Sectors likely to lead the charge in 2019

Small-to-mid cap companies are likely to outperform the broad market this year


Rubber glove makers, oil and gas (O&G) companies, healthcare and insurance sector stocks could easily be the flavour among investors in 2019 despite corporate earnings expected to shift to a lower base.

“We see unexciting earnings growth ahead for the benchmark index mainly due to challenging prospect for sectors like plantations, telcommunications and industrial, which in total account for more than 30% in the benchmark index,” Malaysia (FSM) noted in its 2019 investment outlook report.

The online unit trust distribution arm of iFast Capital Sdn Bhd anticipates lesser support for index stocks due to the absence of foreign investors.

Glove makers remain in favour given their relatively resilient earnings growth profile, while bombed out stock prices in the O&G sector are also gaining new traction.

Technology stocks and construction plays are out, but healthcare and insurance are safe buys.

CIMB Research, in its 2019 outlook report, reckons corporate earnings, which have been disappointing over the course of 2018, will continue to be a key concern for the market this year as corporates adjust to the country’s new policy landscape, trade risks and slower global growth.

“We project potential earnings risks in 2019 due to a likely weaker top line growth, upturn in loan loss provisioning for banks, as well as ongoing reform policies and plans by the government to review and renegotiate contracts entered into by the previous government amounting to RM19 billion,” the research house said.

CIMB Research also foresees “pockets of potential earnings risks” for the banking, plantation and utility players in 2019.

Given the fact that stocks related to these three sectors account for around 58.5% of the FTSE Bursa Malaysia KLCI weightage, the research house cautioned any unpleasant surprises to these sectors’ earnings could move the index negatively.

In terms of top performing sector, CIMB Research said the rubber gloves sector will likely benefit from expansion plans and improved demand for gloves.

The O&G industry is expected to offer good upside potential either due to higher crude oil prices via a stronger orderbook, or expansion- driven earnings growth.

“We also like the healthcare sector for its defensive earnings quality and bright long-term growth prospects, and the insurance sector for its
relatively strong earnings growth and high-dividend yields,” it said.

CIMB Research is retaining its ‘Underweight’ call on the building materials and construction sectors in 2019.

MIDF Research’s top pick is the insurance sector as the sector was the fastest-growing segment in the services segment in the first three quarters of 2018.

It expects the trend to continue in 2019, boosted by further liberalisation of the industry and several government initiatives aimed at increasing take-up rates.

In terms of small- to mid-cap stocks, analysts are optimistic the counters are likely to outperform the broad market in 2019.

After registering superior returns in 2017 (with +15.9%), small caps posted more than 28% year-to-date losses as of Dec 31, 2018.

“We believe the performance of the local small-cap sector was sentiment-driven instead of fundamentally driven,” FSM noted.

According to Bloomberg, in terms of valuations, the local small-cap sector is currently trading at extremely undemanding level of close to -1 standard deviation.

Apart from the fundamental drivers such as the incentives and measures proposed by the government which might help to improve the overall operating environment and increase the competitiveness of the small and medium enterprises (SMEs), FSM highlighted the calendar year performance of the small-cap sector over the past 20 years.

“Malaysia’s small-cap sector tends to deliver strong performance following a year of double-digit losses.

“Hence, after recording more than 38% of losses in 2018 with the cheap valuation as well as the government efforts in boosting the SMEs sector, the small-to-mid cap companies are likely to outperform the broad market in 2019,” FSM said.