MIDF Research has an FBM KLCI target of 1,665 points for 2024.
PETALING JAYA: Following the year-to-date market performance, Kenanga Research is maintaining its end-2024 FBM KLCI target of 1,605 points.
This is based on 15 times the forecast 2024 earnings, which is consistent with the historical price-earnings range of between 14 times and 16 times post the economy reopening, said the research firm in its second quarter 2024 (2Q24) investment strategy report.
The key driver for global markets this year is expectations of policy easing by central banks in advanced economies, particularly by the United States Federal Reserve (Fed). This will augur well for emerging markets (EM), including Malaysia, in two major ways.
Firstly, it will make EM assets attractive again, given a lower risk-free return of developed market (DM) assets, while EM assets offer a strong potential in terms of translation gains.
“The lower borrowing cost of hard currencies will also be supportive of the EM carry trade, ie, borrowing in low-interest hard currencies to invest in high-yielding EM assets such as equities, bonds, commodities and real estate.”
Secondly, a synchronised recovery in advanced economies underpinned by policy easing will fuel an export boom in the largely export-dependent EM economies.
This will provide a lift to their domestic labour markets and wage growth, and hence consumer spending.
In addition, the export sector in EM may also be buoyed by the recovery of the global semiconductor sector.
At its meeting in March, the Fed kept the target range of its funds rate at 5.25%-5.50% and end-2024 Fed funds rate forecast of 4.6%, effectively signalling three rate cuts in 2024, said Kenanga Research.
On the other end, risk factors that could derail the rally in the local market are policy rates staying higher for longer in advanced economies and the performance of China’s economy, which has experienced a noticeable slowdown on the back of an export slump, weak domestic consumption and losses in household wealth due to the crash in both the stock and property markets.
Freight cost inflation and supply-chain disruptions arising from the Red Sea conflict could also weigh on the Malaysian economy. However, Kenanga Research said it takes comfort that these issues are manageable.
“We pick banks for a proxy to the return of foreign investors given the heavy weighting that banking stocks command in various indices. We are upbeat on contractors given the imminent rollout of the MRT3, Bayan Lepas LRT and the six flood mitigation projects reportedly to be worth RM13bil.”
In the oil and gas sector, it likes offshore supply vessel owners due to a supply crunch on a surge in demand leading to strong charter rates and floating production, storage and offloading players given the current upcycle in the space.
However, it said the recovery in global semiconductor sales may take time to be fully transmitted to local players, which are mostly involved in the back-end of the semiconductor supply chain.
Meanwhile, MIDF Research has an FBM KLCI target of 1,665 points for 2024, pegged to a price-earnings of 14 times.
It said the world’s equity market would remain generally bullish due to the possible onset of Fed interest rate cuts, while earnings are expected to be stable given the better economy growth seen for Malaysia.
“Moreover, the prospect of a stronger ringgit vis-à-vis the US dollar would attract returning inflow of foreign funds, hence providing a necessary fillip to the local equity market.
“On the flip side, we advise investors to tread cautiously and be wary of the lingering risk of a US recession, as well as the unsettling situation in Ukraine and Palestine which could escalate,” MIDF Research said in its report.
On the local economy, the research firm maintains its expectation of growth hitting 4.7%, to be driven by resilient domestic demand and external trade recovery.
A recovery in external trade will benefit trade-related stocks such as logistics and ports. The research firm still sees the prospect of an upside in the construction sector.
