KUALA LUMPUR: Lower valuations and a weak ringgit are expected to support further buying appetite for local securities including bonds.
Trailing valuations on the benchmark FBM KLCI will continue to be below the average mean of about 17 times, according to Rakuten Trade head of research Kenny Yee.
“While market volatility will likely remain on the US inflationary pressures, foreign investors are looking at this region as they are attracted by the low valuations and weak currencies,” Yee said at Rakuten’s webinar on Malaysia’s fourth-quarter 2023 market outlook.
“For the year-end, we expect the FBM KLCI to touch the 1,560 level and this is at a 16-time price-to-earnings ratio (PER) valuation, which is still below the historical PER average of 16.5 to 17 times.
“I don’t think I am too bullish and 1,560 seems like a reasonable level,” he added.
Yee said the nature of foreign buying on Malaysian securities appears to be driven by long-term instead of short-term capital.
“This is reflected by the improved foreign shareholding (statistics) on the local market. The short-term capital is like hit-and-run as they would not usually register themselves to be reflected in the shareholding base.
“Usually, short-term capital would just come in, make money and sell. They would hold for one or two days at most but the longer-term investors would take the trouble to register themselves to reflect their holdings,” explained Yee.
Last week, foreign investors continued to be net buyers on Bursa Malaysia at RM550.9mil, which was 2.3 times higher than the week prior, MIDF Research said in its latest report.
It was the highest net foreign inflow over the past eight weeks, the research house said.
“They were net buyers every day last week, registering net purchases of over RM100mil daily except on Thursday, when the amount moderated to RM48.7mil after the Federal Reserve’s (Fed) second skip of the year,” it noted.
While further hikes in interest rates may soon be executed by the Fed, Yee said the ringgit may not see much further downsides from here on.
But he did not discount potential knee-jerk reactions.
“Even now, there is already a huge disparity between the US 10-year Treasury yields of about 4.5% while the 10-year Malaysian Government Securities is at 3.9%.
“The ringgit has already weakened quite a bit, so if there is any reaction, it might be a short-term knee-jerk reaction. If this is averaged out, the impact may not be that much,” he said.
The ringgit is also supported by the stronger oil prices, which would be positive for the local economy in the bigger picture, he noted.
After a fall in the middle of this year, oil prices have climbed back to 10-month highs as major oil producers Russia and Saudi Arabia extended their production cuts to the end of the year.
Brent Crude Oil was last traded at US$92.04 per barrel as at press time.
On this note, Yee cautioned that higher oil prices could have further inflationary effects on the United States from higher petrol pump prices.
“This would likely negate what the Fed is doing (rate increases) to control inflation and certainly with high oil prices, this is a factor that we should take note of.
“For countries such as Malaysia, it is beneficial as our crude oil price trades at a premium when compared to the main global benchmarks of West Texas Intermediate and Brent Crude,” Yee said.
He also said the possibility of further interest rate hikes in Malaysia by Bank Negara remains remote, despite expectations of further rate hikes in the West.
“Nevertheless, all sectors will be affected if the Fed increases rates by another 0.5%.
“Despite the recent hike in rates by the Bank of England and the European Central Bank, Asian central banks appear to be reluctant to raise rates. They prefer rates that are accommodative to stimulate economic activity,” Yee pointed out.
“I don’t see any more reason why Bank Negara would want to increase the interest rates to defend the ringgit. The last time they rose the rates, it didn’t do anything to the ringgit and in fact the currency weakened against the US dollar,” he added.
Further rate hikes locally can risk lowering the disposable income of the people, given an overall high debt-to-gross domestic product ratio.
“This contradicts the government’s stance on improving our livelihood. So if there is no positive effect, why increase the rates? This is why I believe there is no strong reason for Bank Negara to raise rates,” Yee said.
Meanwhile, Rakuten Trade vice-president of research Thong Pak Leng said further rate hikes in the country also put barriers to economic growth.
“Maintaining the interest rate at 3% is quite fair since headline inflation is controlled,” Thong said.
On his sector picks, Thong said the construction sector is the most exciting industry at the moment due to the flow of projects.