Is the market rally sustainable?


The strong foreign direct investments prospects, coupled with a myriad of sensible reforms and conducive economic policies, are converging to position Malaysia as an attractive investment target.

THE local stock market is revving up nicely, with a decent 10.5% gain year-to-date and 16.4% over the last 12 months.

The benchmark FBM KLCI also touched 1629 points on May 23, a level last seen in early 2021.

Consensus predictions are that it will hit a 12-month target of 1745.5 points.

The question many are asking is if this is going to be a sustainable rally? Going by some indications, the rally looks like it is having more legs to move on.

There have been net foreign fund inflows in recent weeks.

There is the low base element — our market has been in the doldrums for nearly a decade.

And a number of thematic plays are lighting up the local market.

The data centre (DC) one needs little introduction as the billions of ringgit being invested by foreign parties seeking to build their DCs here has been the news of the day for the last few months.

The money flowing in is real and aside from landowners selling out to DC operators, there are also contractors like Sunway Construction Bhd winning big contracts to build out the DCs.

As DCs are big energy guzzlers, analysts are turning bullish on Tenaga Nasional Bhd and other companies that are involved in the setting up of the electricity infrastructure needed for the DCs.

The local equity market is also seeing some new sources of liquidity following the privatisation of listed companies such as Malaysia Airports Holdings Bhd, MPHB Capital Bhd and Ranhill Utilities Bhd. Shareholders in these companies cashing out into the buyout offers would have to find a place to place to invest their cash proceeds.

There is also the point about how early this year, government-linked investment companies (GLICs) were instructed by the government to focus more on domestic investments rather than taking their money out of the country. This in turn means that these GLICs will be looking harder for investments in the local scene and one obvious destination for them would be the local stock market.

Recently, the Employees Provident Fund’s (EPF) chief executive officer Ahmad Zulqarnain Onn said the provident fund’s new investment annual allocation has increased to above 70% for the domestic market. It stood at 64:36 at the end of 2022.

To be sure, the EPF’s domestic investments are more focused on lower-risk assets, particularly fixed income.

But Ahmad Zulqarnain added that there are still untapped investment opportunities within Malaysia, including sectors like DCs and industrial logistics.

Another sign that both GLICs and privately managed funds are seeking more opportunities in the local stock market is the fact that these funds are now active investors in ACE Market stocks, something which was not so prevalent before.

Anecdotally speaking, just look at the shareholding list of a company called KJTS Group Bhd, which listed on the ACE Market in January. The building support services provider counts a string of funds as its shareholders now, based on its annual report.

Then there is the semiconductor play, where Malaysia’s stronghold in the sector continues to benefit from the ongoing trade war.

However, with some of our semiconductor stocks trading at toppish valuations, one wonders if the sector is fully valued?

That isn’t stopping some research teams from calling out more buys – one local bank’s private banking division is suggesting that despite the KL Tech index having a good rally thus far, they think there is more upside. They believe that while the sector now trades at around 30 times FY2025 earnings, it still pales in comparison to the 2020-2021 period when the sector traded at 49% prospective earnings.

They say that the local semiconductor industry will continue to benefit from the sector’s recovery, electric car (EV) companies’ capital expenditures, the DC expansion plans and with Malaysia continuing to benefit from the China + 1 strategy stemming from the trade war. Furthermore there is the push by the government to boost the local semiconductor sector.

All that said, for there to be a sustained rise in our market, earnings of listed companies need to continue to improve, following on from the impressive first quarter of the year (1Q24).

Many believe the market rally is sustainable, albeit periodic pullbacks due to ongoing geopolitical tension in the Middle East. Many large caps stocks have seen steady and sustained rallies. Real estate stocks, for example, have not seen such a strong and broad-based rally since the mid 1990s pre-Asian Financial Crisis.

Observers say prospects of a reversal of the two-year relationship between the ringgit and US dollar plus the relative undervaluation of Bursa Malaysia is a driver to attract foreign portfolio flows.

The strong foreign direct investments prospects, coupled with a myriad of sensible reforms and conducive economic policies, are converging to position Malaysia as an attractive investment target.

This article first appeared in Star Biz7 weekly edition.

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