Corporate earnings weakness dragging Bursa lower

Corporate earnings growth has been dismal with costs escalating as the new govt restores some taxes to make up for unpaid tax refunds


The benchmark FTSE Bursa Malaysia (FBM) KLCI is expected to fall to as low as the 1,538-point level in the first half of 2019 (1H19), should the current downward trajectory in corporate earnings persist.

Inter-Pacific Research Sdn Bhd research head Pong Teng Siew said it is still a developing scenario.

“Any expectations for a global recession that may drive valuations even lower are not incorporated at this point,” he said in a recent strategy research note.

The FBM KLCI closed 4.9 points down at a low of 1,667 yesterday after hitting a high of 1,684 in intraday trade.

Pong said corporate earnings growth has been dismal with costs escalating as the Pakatan Harapan government restored some taxes to make up for tax refunds that went unpaid.

“A well-remunerated civil service kept domestic consumption humming, but just as we warned in our Jan 18 report, there was a price to pay — an urban/private sector workforce polls backlash.

“There is no respite even without the Goods and Services Tax, as inflation-wrecked household budgets have failed to recover,” he added.

On the external sentiment, there are various uncertainties that can further hamper the FBM KLCI.

The Inter-Pacific report added, as it is, Malaysia’s plot of foreign funds’ net invested sums has again swung over into deeply underweight levels.

“Why we fear fresh lows will be made for the FBM KLCI, is that these allocations may get pared down to severely underweight levels during the period when the US economy is mired in a recession and a global crisis of some form unfolds,” Pong said.

The net impact from the US-China trade war is a murky uncertainty on the local economy.

“Slowing world trade is not good news (for Malaysia). A limp ringgit is always good news for Malaysia’s tech stocks. Not so, this time around,” he said.

Pong said not all hope is lost because the external trade sector is perceived as a “beacon of hope amid an otherwise dull landscape”.

In October 2018, export growth surged to 17.7% year-on-year (YoY), the best pace since January 2018, while the trade balance swung to a record high of RM16.32 billion.

Pong explained that this is believed to be a belated reaction to the ringgit weakness and does not represent front-loaded orders ahead of a tariff hike planned for January 2019 on Chinese imports.

“Now that a 90-day truce with regards to new tariffs has been called as part of a deal hammered out in Argentina on the sidelines of a Group of 20 meeting, the ringgit may fall again if this reasoning is flawed.

“Nevertheless, we hope strong external trade performance will again save Malaysia in these dark times,” he said.

Pong said in addition to the external trade sector, there are too many uncertainties about investment outcomes but hopes are high.

“Tech stocks may boom anew, contingent on a resolution on trade issues, but a confidence reboot is still considered premature.

“Commodity prices may recover fleetingly in 1H19, but it’s too late to boost the plantation, as well as oil and gas stocks,” he said, adding that a global slowdown threatens to overshoot, which would pave the path for a hard landing.

He stated that the construction sector has been a victim of wrecking balls swung by the Pakatan Harapan government at mega projects.

The property sector is still mired in Bank Negara Malaysia’s macroprudential muck and despite strong demographic trends and low rates, the lack of affordability stifles demand.

On the banking sector, Inter-Pacific noted that the sector’s fundamentals appear to have taken a turn for the better, suggesting a further upside ahead.

“The banking system loans growth trailed deposits growth slightly in October 2018. Consequently, the loan/deposit ratio has stabilised and interbank borrowing rates have remained stable so far,” the report noted.