KLCI dragged down by plantation, MIDF says 2019 may be a better year

Local market could rebound to 1,830-point level by end-2019 with a recovery in corporate earnings


The bearish pressure on the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) will continue into the New Year unless window-dressing activities by funds kick in, or if there is a recovery in crude palm oil (CPO) prices.

Malaysian Industrial Development Finance Bhd (MIDF) head of strategy and quantitative analytics Syed Muhammed Kifni Syed Kamaruddin said the local market has been bogged down mainly by plantation and gaming counters, and Tenaga Nasional Bhd.

“If it wasn’t for banking stocks, the FBM KLCI could have been down further because of the downtrend in CPO prices.

“To put things into perspective, the Plantation Index is down 18% year-to-date (YTD), while the Financial Index is up 1.5% YTD,” Syed Muhammed Kifni said during MIDF’s 2019 Market Outlook briefing in Kuala Lumpur yesterday.

The benchmark FBM KLCI is down 9% YTD.

The investment bank’s top picks for the banking stocks are CIMB Group Holdings Bhd and Malayan Banking Bhd, going into the New Year.

He opined that last year’s close for the FBM KLCI is still achievable, should window-dressing activities kick-in over the next few trading days remaining.

“Otherwise, the KLCI support level would be at the 1,600 level and it will remain so till year-end” he said.

On next year’s outlook, Syed Muhammed Kifni said the FBM KLCI could rebound to the 1,830-point level by end-2019 with a recovery in corporate earnings.

Assuming no further escalation in trade tensions between the US and China, he believes the 1,830 level target should be achievable.

He added that the local equity market would be trading rangebound next year with profit-taking and performance-chasing activities taking place.

“Corporate earnings for 2019 are expected to grow by 5.8% compared to 1.96% anticipated for this year.

“We foresee opportunities for investors to enter the market now as the FBM KLCI is about 150 basis points lower than what we projected for at the end of 2019,” he added.

Syed Muhammed Kifni said the market’s price earnings ratio valuation for next year is also expected to improve to 16.2% from the current level of 15.8%.

“While Malaysia’s economy remains on good traction, we foresee geopolitical events to cast a shadow on investor sentiment. MIDF expects to see an average daily volume above 2.2 billion shares and average daily traded value of RM2.2 billion daily,” he added.

Global Impact

MIDF is expecting 2019 to be another challenging year for the local equity market, underlined by external issues such as Brexit, the trade war between China and the US, and their impact on the global economy.

MIDF head of research Mohd Redza Abdul Rahman said the escalating trade tension and heightened uncertainties in trade policy could impede the global trade outlook in 2019.

“The introduction of restrictive trade measures and tariffs have influenced the pattern of trade flow and prices across targeted sectors.

“Protectionist policy announcements have adversely affected business sentiment in recent months, as well as investment plans,” he said, adding that the trade issue could cut 0.71% off global economic growth next year.

He said financial conditions have tightened in emerging markets (EMs) and anticipates that a faster than expected monetary policy normalisation in advanced economies could lead to further financial market pressures on EMs.

Domestic Resilience

Leading indicators suggest Malaysia’s economic growth will improve to 4.9% year-on-year in 2019, MIDF noted.

Clarity in domestic policy direction in the 11th Malaysia Plan midterm review and Budget 2019 will lend support to the domestic sector.

“The new economic direction which focuses on a free market and (being) investor friendly will have significant impact on overall business confidence and investment flows,” Mohd Redza said.

MIDF expects Bank Negara Malaysia to maintain the Overnight Policy Rate at 3.25% next year amid decent economic growth.

“Sustained current account surplus could help strengthen the ringgit to the US dollar/RM4 level by the end of 2019,” Mohd Redza added.