Is the correction over?

THE stock market has not been performing well since the start of the year, no thanks to external factors and the lack of strong local catalysts.

Year-to-date, the benchmark FBM KLCI is down about 8%, underperforming several global key benchmarks.

The sell-down is not unique to the local bourse as headwinds in the form of uncertainties over US trade policies and the risks of a global slowdown continue to stoke fear among investors.

The question now is, with the benchmark underperforming and with foreign shareholding in Malaysian stocks near its record low of 19.4%, is the correction over?

Vincent Lau, head of equity sales at Rakuten Trade, seems to think so.

He says he is positive on the market, based on its current depressed valuations.

“We are probably very near the bottom as year-to-date, there has been an outflow of RM7.55bil already,” he tells StarBiz 7.

Foreign shareholding in Malaysian stocks fell to a record low of 19.4% in January.

Lau reckons it’s a “buy” market now.

“Six months down the road you will say you should have bought if you have not already... the uncertainties surrounding US President Donald Trump’s tariffs and an overly cautious risk-off model have been causing the outflows.

“Once settled down, our market should bounce back proper,” he adds.

Areca Capital fund manager and CEO Danny Wong who manages more than RM5bil in funds, also opines that foreigners are likely to have finished selling off Malaysian stocks, at least for now.

“It looks like most, if not all, the inflows of 2024 have already exited. Another massive selldown would need a major shock like a huge geopolitical crisis,” Wong says.

Defensive strategy

He says while uncertainties over US tariffs may continue to affect investor sentiment, the turning of the sentiment will result in a sharp rebound due to the market’s current low base valuation.

Rakuten’s Lau reckons that many of the government’s new investment initiatives will also continue to lend support to the local market.

“And despite some hiccups, I believe data centres are still a story and will last at least another two to three years,” Lau adds.

MIDF Amanah Investment Bank Bhd head of research Imran Yusof is not as positive.

He reckons the market is experiencing heightened volatility induced by US tariff uncertainties and government policies.

“The uncertainties on US tariffs with flip-flops on quantum, timing, exemptions and so on are causing difficulties to investors and more importantly businesses, in the area of forecasts.

“It is also a concern that this may affect the economy and corporate earnings. Hence foreign investors are in a risk-off mode.”

Imran is recommending a defensive investment strategy to weather current uncertainties.

He believes one of the potential catalysts for the Malaysian market is corporate earnings which he says, have been observed to be “robust”.

Affin Hwang Investment Bank analyst Loong Chee Wei points out that following the recent market correction, the FBM KLCI’s 2025 price earnings ratio (PER) of 14.1 times is “attractive”, trading close to the one standard-deviation or SD, below the 10-year mean level of 14.6 times.

“We expect the FBM KLCI to revert close to mean level of 16.9 times by end-2025 supported by our positive outlook on the economy (real gross domestic product growth of 5.2% in 2025), corporate earnings growth (core earnings per share growth of 6.3% for FBM KLCI stocks), a sustained strong investment cycle and an expectation of a stronger ringgit,” he tells clients.

Loong says Affin Hwang’s year-end FBM KLCI target is 1,780, based on the 2025 target PER of 16.5 times (potential upside of 17.7%).

Over the past five years, the FBM KLCI has rebounded within two months after falling close to the 1 SD below mean level, he points out.

“We believe value stocks with good fundamentals will outperform in the long run. An indication of attractive valuations for stocks are those that are trading at 12-month forward PER close to 1 SD below 10-year historical mean level.”

The stocks under Affin Hwang’s coverage with “buy” calls and trading at this level are Axiata Group Bhd, Hong Leong Bank Bhd, Telekom Malaysia Bhd, YTL Power International Bhd, Kuala Lumpur Kepong Bhd and Public Bank Bhd.

In the United States, the Nasdaq Composite, one of the key stock market indexes, entered market correction territory about two weeks ago after it closed more than 10% below its recent record high.

The index has continued to be on a downtrend since, and as of Wednesday, it was trading about 12% below the record high it had reached in December.

Nevertheless, experts have been pointing out that the US stock market has always been resilient, with the Nasdaq recovering from each one of its past corrections.

The same can be said of Bursa Malaysia stocks generally, although it pays to be cautious even when buying on huge dips.

Stocks with issues surrounding their fundamentals should be avoided at all costs.