Malaysian stocks’ valuations attractive for 2H18, say analysts

Institutional reforms under the new govt could also lead to a re-rating of the market in the medium term


Analysts maintain a ‘Neutral’ outlook on the Malaysian stock market for the second half of 2018 (2H18) as macro risks and domestic policy changes continue to weigh on local equities, despite valuations are attractive in a regional context.

Nomura head of Malaysia equity research Tushar Mohata said the odds in Malaysia’s favour include strong local institutional fund ownership within the stock market that has proved an effective defence against foreign funds outflow from the local bourse and current account surplus.

Tushar said institutional reforms under the new government could also lead to a re-rating of the market in the medium term.

He noted that Indonesia and India saw sharp re-ratings in valuation multiples after new leaders were elected in 2014.

“The new Malaysian government is currently focused on fulfilling all election promises. Once the agenda moves on to delivering credible reforms, there is a possibility of valuation multiple re-rating, which foreign investors will like,” he said at a media briefing in Kuala Lumpur last Friday.

“If there is credible progress in the reform agenda, Malaysian equity markets could also re-rate higher.”

However, the downsides for Malaysia include an expected slowdown in gross domestic product this year, along with the possibility of an escalating trade war and weaker demand from China.

Tushar expects the FTSE Bursa Malaysia KLCI (FBM KLCI) to hit 1,830 points by the end of this year and 1,940 points by end-2019.

He said Malaysia is gaining traction among investors as it is seen as a relative safe haven within Asean amid global trade tiffs, partly due to limited exposure to the technology sector — where trade tiffs hit hardest — and modest downside risks for earnings expectations.

“Although Malaysia is not that cheap in terms of equity valuations, Asean markets are not trading at a premium since the global financial crisis compared to North Asia markets,” he added.

Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid noted that post-general election jitters seem to have subsided, with foreign investors having turned net buyers during the last four days of the past week.

Still, he said caution will prevail in the local markets, particularly within the global context with ongoing US-China trade tensions.

Speaking to The Malaysian Reserve, Mohd Afzanizam said the US Institute for Supply Management manufacturing index fell to 58.1 points in July.

Responses from the survey suggest that businesses have to contend with rising costs, increasing customs inspection time and the need to onshore raw materials, while China’s slowing economy could lead to non-tariff measures particularly on currency.

“The selldown by foreign investors since the 14th General Election (GE14) has led to attractive price-to-earnings multiples, so we think it is going to be a tight range market in 2H18. It will definitely be selective in terms of sectors.

“Perhaps, there is room for further appreciation in the export-oriented industries such as rubber gloves and electrical and electronics, in view of the weak ringgit,” Mohd Afzanizam said.

The FBM KLCI closed 0.8 point, or 0.04% higher, at 1,805.75 last Friday, after hitting an intraday high of 1,812.69.

The key index, which fell below the 1,700 level in mid-June for the first time since March 2017, broke through 1,800 again last Wednesday with a close of 1,870.73, making a recovery to positive year-to-date post-GE14.

Despite anticipation for consumer confidence to recover gradually in the near term on the zero-rating of the Goods and Services Tax (GST) and associated perception of disinflation, business sentiment remains volatile due to policy uncertainty.

“The government moving fast on reforms will continue to create an environment of optimism.

“On the other hand, businesses are awaiting policy clarity from the government and the impact on their cost of doing business, in areas like rising electricity prices and foreign worker crackdown,” Tushar said.

He added that the administration is likely to look to government-linked companies for special dividend payouts to make up for the shortfall following the zero-rated GST.

On a sectorial basis, the outlook for the banking, property, gaming, and oil and gas (O&G) industries is positive as banks and real estate will benefit from consumer confidence having hit a 21-year high in the second quarter of 2018, while the O&G sector is expected to see higher capital expenditure and activities from Petroliam Nasional Bhd from 2018 to 2020.

The plantation, construction, telcos and media sectors are facing a bearish run, with construction hit by government caution on infrastructure projects, while regulatory changes in favour of consumers could hurt telcos and media players.