Geopolitical concerns were rife in 1H18, but macroeconomic fundamentals are still strong for Malaysia, says analyst

By DASHVEENJIT KAUR / Pic By ISMAIL CHE RUS

Investors could return to Bursa Malaysia in the last quarter (4Q) of the year amid the threat of a trade barrier, rising interest rates and geopolitical uncertainty that continue to generate volatility on global markets.

Rakuten Trade Sdn Bhd head of research Kenny Yee believes the end of the bearish phase in regional stock markets could lead to a reversal in foreign funds flows as the local equity market provides a safe haven underpinned by favourable fundamentals.

“Geopolitical concerns were widespread in the first half of the year (1H18), but in our view, macroeconomic fundamentals are still strong for Malaysia,” Yee told reporters at Rakuten’s 2H18 market outlook briefing in Kuala Lumpur yesterday.

He noted that the steady fundamentals will act as a shelter and spur buying opportunity, especially of stocks that have high domestically sourced revenue.

“Malaysia has been a perennial safe haven in this region for many foreign funds when they eye returns,” Yee said, adding that he anticipates the outflow to reverse, possibly in the 4Q.

“Concerns over external issues, particularly the trade war between the US and China, potential rate hikes by the US and other central banks, as well as the strengthening of the US dollar, still linger.

“Hence, for now, we believe Bursa Malaysia will be impacted by the heightened regional volatility over the next few months, but the worst is close to over,” Yee said.

He reckons the local equity market is more exposed to global issues and, to a lesser extent, to the domestic political landscape and impending overhaul of some governmentlinked companies (GLCs).

“It is good to note that the prevailing kitchen-sinking in the country is only a short-term pain,” Yee said.

In comparison with regional peers like Singapore, the Philippines, Thailand, Vietnam and Indonesia, Malaysia faces the lowest volatility, according to Yee.

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) has eased by about 5.86% year-to-date (YTD), he explained, compared to the Philippines’ PComp , which has a decline of 17.54% YTD followed by Thailand’s STE (-10.74%), Indonesia’s JCI (-8.52%) and Singapore’s STI (-5.48%).

On the currency front, it is the same story with the ringgit having a minimum YTD change compared to regional peers.

“The Malaysian ringgit against the greenback has only lost 0.28% of its value YTD, while the Indonesian rupiah and the Philippine peso has lost 5.33% and 7.05% respectively,” Yee said.

Based on the online broker’s findings, Yee recommended indexlinked blue chips as most of the counters are trading at attractive valuations at present.

The research firm’s top picks include Malayan Banking Bhd, Kuala Lumpur Kepong Bhd, Genting Bhd and Telekom Malaysia Bhd.

“Foreign funds will soon enough take advantage of the cheaper ringgit. However, until market liquidity is restored, we would advise investors to re-look at the small-cap space,” he added.

Rakuten has a year-end target of 1,895 points for the FBM KLCI based on 16.5 times multiple to price-toearnings. On corporate earnings growth, Yee anticipates a 6.8% increase for financial year 2018.

AmBank Research also holds a positive outlook for the local equity market.

It sees the next 12 to 18 months to be bright and projects the FBM KLCI earnings to grow by 5.8% and 7% in 2018 and 2019 respectively.

In its research note recently, AmBank said the optimism is underpinned by an annual gross domest ic product growth of 5.5% and 5.3% in 2018 and 2019 respectively.

It has maintained its year-end targets of 1,900 and 2,040 points in 2018F and 2019F respectively for the FBM KLCI based on 18.5 times forward 2018 and 2019 earnings respectively.

AmBank expects the rising US interest rates cycle and a strengthening dollar to keep the outflows of funds from the emerging markets (EMs), including Malaysia.

However, it believes investor sentiment towards EMs will improve at some point.

“Perhaps, when the market feels the US rate hike cycle and the US dollar upcycle are about to taper off, when the risk-and-reward profile and valuation-to-growth matrix of EMs become attractive again (after the recent sell-off).

“Also, if commodity prices stay firm, strengthening the finances of commodity-exporting EMs,” it noted.