KLCI dragged by risk-averse investors, weak earnings

Analyst says the trade war caused investors to switch to safe-haven assets


The lack of market catalysts, coupled with negative external news flow, continues to weigh on the Malaysian equity market, year-to-date (YTD) the region’s worst performing market.

JF Apex Securities Bhd head of research Lee Chung Cheng said the absence of market stimulus and domestic and external uncertainties, underpinned by weak corporate earnings, have negatively impacted investors’ sentiment towards Malaysian equities.

“Aside from sluggish company earnings and domestic policy uncertainties, an absence of domestic catalysts and uncertainties from the external environmental have weighed on the market,” he told The Malaysian Reserve (TMR).

The bearish pressure from issues like US-China trade friction, concerns over slower global economic growth and Malaysia’s fiscal position has been cushioned somewhat by stabilising energy prices, he added.

Local benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) rose 6.65 points or 0.4% to 1,671 points yesterday, well below its high of 1,730.68 on Feb 21 this year.

YTD, the benchmark has declined 1.14%, according to Bloomberg data.

The FBM KLCI and Malaysia’s corporate earnings per share have been on a steady decline since the 14th General Election in May last year.

Corporate earnings fell 3.15% in 2018, while neighbours Singapore and Indonesia posted 8.8% and 18% gains respectively.

The aggregate reported earnings of FBM KLCI’s top 30 constituents slumped 22.4% year-on-year to RM11.58 billion in the fourth quarter of 2018, according to MIDF Amanah Investment Bank Bhd.

A net total of RM447.7 million worth of Malaysian equities were disposed of by foreign funds in the final week of February, the highest in nine weeks, it said in a recent research note.

Lee said the FBM KLCI is still fairly priced based on its price-to-earnings (PE) ratio.

“We believe Malaysia’s equity market is fairly priced from the perspective that its PE valuation is still trading at a premium to most of its peers,” he said.

“Our year-end 2019 target for the index is 1,700 on expectations of a recovery by the second half of the year and prospects of the US Federal Reserve taking a pause on rate hikes.”

He noted a sustainable recovery will be contingent on a recovery in corporate earnings.

In the meantime, Oanda Corp senior market analyst Jeffrey Halley said Malaysia and emerging markets (EMs) have suffered from poor economic data coming out of China and a lack of progress on the US- China trade war.

He said this caused investors to turn risk-averse and switch to safe-haven assets such as US bonds and gold.

“Malaysia gets grouped in both South-East Asian and Greater Asian EMs, meaning its fate is often not it’s own,” he told TMR.

“Higher oils prices, a US-China trade deal or an improvement in global developed market economic data will provide the catalyst for Malaysian equities.”

Concerns over the current government’s ability to enact policy changes after the last two by-election results and the overall effectiveness of fiscal consolidation efforts have resulted in investors adopting a wait-and-see approach.

“In the longer term, as long as the government stays fiscally sensible, and in the absence of a cataclysmic political development, these factors remain minor in the bigger picture,” Halley said.

Finance Minister Lim Guan Eng has called on investors to buy Malaysian assets before they turn expensive once Malaysia’s fiscal situation is resolved in three years.

Halley, however, said further clarity from US-China trade relations is needed before making a definite long-term call on Malaysia’s equity market.

“A positive resolution along with more dovish central banks globally should provide a more bullish environment for equities in general,” he said.