Promising for equity markets barring headwinds

AS 2024 comes to a close, it is an opportune time to reflect on the financial markets and what it has given investors this year.

Reflecting on last year’s forecast, this column predicted that the US equity markets would likely trend higher for a longer period with a target of 40,000 points on the Dow Jones Industrial Average, the S&P 500 Index to surpass 5,000 points based on consensus expectations, and the Nasdaq 100 might even pass the 20,000-point psychological barrier.

A year on, the Dow was last seen at 43,297 points, while the S&P 500 and the Nasdaq 100 closed at 6,040 points and 20,031 points respectively on Christmas Eve. On the local bourse, the FBM KLCI performed reasonably well, rising by 10.2% year-to-date and on pace to record the highest annual rise in 11 years.

Aside from the strong equity market performance, investors made good returns too on select commodities, led by stellar gains in cocoa and coffee, which rose by 182% and 75% respectively while precious metals like gold and silver outshine most equity markets, rising by 27% and 26% respectively.

Palm oil surged nearly 22% but soybean oil fell by almost 25%, resulting in palm oil trading at a 14.4% premium to soybean oil.

This year was also exceptionally strong for cryptocurrencies, led by a 133% gain in bitcoin and ethereum’s 52% rise.

As mentioned last week, whether it’s the global or the Malaysian economy, the outlook looks promising on the back of disinflation in most economies as well as aggressive rate cuts this year and will likely spill over into 2025.

What is clouding the horizon is what US president-elect Donald Trump will bring to the table and the world order.

As for Malaysia, the outlook for next year too is positive with growth likely to hit 5%, driven by a few domestic economic drivers.

The political stability will likely carry through next year, barring any unforeseen circumstances or a shift in political alignment post-Sabah elections, which is due by end-2025, but may be held earlier.

Domestic themes

The signing of the Johor-Singapore Special Economic Zone agreement next month will likely pave the way for a slew of investment activity in the southern state, fuelling further growth in multiple industries.

Data centres, one of the strongest market themes this year, are expected to see further growth as well as the start of operations for those who got the ball rolling earlier.

The government’s move to raise civil servant salaries as well as raise the minimum wage next year will also likely see pent-up demand for selected sectors, especially those related to the consumer sector and even perhaps large-ticket items, due to higher affordability.

However, Malaysia’s move for subsidy rationalisation, starting with diesel this year and for RON95 petrol by June 2025, may curtail some domestic demand, but this is only expected to hit the top-15 category.

The market may also be paying particular attention to two critical policy documents – the tabling of the 13th Malaysia Plan and Budget 2026, potentially the last window for the unity government to re-introduce goods and service tax.

Going for large caps

Over the past year, select names have cropped up at the FBM KLCI, and among them are Gamuda Bhd and 99 Speed Mart Retail Holdings Bhd in the recent review, Sunway Bhd in the June 2024 review, and YTL Corp Bhd and YTL Power International Bhd in last year’s December review.

The emergence of these new names on the KLCI has added a new dimension and growth story of the underlying sectors that they represent and a reflection of market themes.

Both the YTLs are well positioned to ride on the data centre as well as the construction theme that has been a strong pillar of earnings growth. This has also spilled over into companies like Gamuda and Sunway.

Among the other larger capitalised stocks, high dividend yields and resilient earnings should be a plus point for select banking stocks while plantation names should also benefit from a firmer crude palm oil price, which is expected to average RM4,500 per tonne from this year’s RM4,200.

Telecommunication companies may also be exciting in 2025, with the potential listing of U Mobile Sdn Bhd, which may lift the relative valuation of more established players like Maxis Bhd and CelcomDigi Bhd.

Outside the main index, there are also opportunities to ride on other market themes such as the large inflow of foreign direct investments, sustained domestic investments, potential announcement of large infrastructure jobs like the KL-Singapore High Speed Rail and Penang light rail transit, and other large infrastructure jobs related to data centres and renewable energy.

The real estate investment trust sector looks decent in terms of yield and growth expectations, while higher tourism arrivals could also re-ignite interest in the aviation and hospitality sectors.

The property sector looks rather stretched after a decent run this year, while the glove sector may be re-rated should China’s exports to the United States take a turn for the worse.

Within the utility sector, Tenaga Nasional Bhd is an obvious choice, given its dominant position and growth in electricity demand, that will drive its topline and enhance earnings.

Key underweights should be the automotive sector, given the strong pent-up demand in 2023 and this year, while the oil and gas and petrochemicals sector is seen going into some rough patch, due to softer demand and narrowing margins.

Bigger IPOs in 2025?

The biggest initial public offering (IPO) of 2024 was no doubt 99 Speed, which raised RM2.36bil.

Having listed 55 companies on the local bourse this year, 2025 promises to be another bumper year with at least 50 IPOs in the pipeline.

They include Main Market-bound companies like Eco-Shop Marketing and Cuckoo International, and Oriental Kopi Holdings.

While ACE-market listing will likely dominate new IPOs, the pipeline for Main Market IPOs too remains rather healthy.

Additionally, Malaysia is now seen as an IPO hotspot in the region and the likelihood of more foreign-based companies seeking secondary or primary listing should not be discounted.

Based on current expectations, Malaysian corporates are expected to deliver core earnings growth of about 13.3% in 2024 and slowing down to approximately 9% next year.

The slower earnings momentum reflects the higher base for 2024 earnings as well as slower economic growth in 2025.

Index-wise, the market consensus paints a rather bullish outlook with the FBM KLCI seen hitting 1,790 points within the next 12 months, giving an upside of about 11.7% year-on-year.

Valuation is key

Assuming the market’s expectations in terms of next year’s earnings growth are sustained, the market’s valuation at the index target level is not excessive, coming in at just about 15.6 times next year’s earnings.

With about 11.7% potential upside, the local bourse is expected to perform reasonably well in 2025, barring any unforeseen circumstances.

The equity market has the legs to go higher based on decent earnings growth expectations.

However, market dynamics may quickly change on potential headwinds coming from Trump’s economic policy and tariffs, geopolitical concerns and any change in rate cut expectations or inflationary pressure.