Policy clarity and new CEOs will help market recovery in 2H19

After the kitchen-sinking exercises, corporate results should be able to drive share prices, says analyst


Malaysia’s stock market, which has been battered in the last 12 months, is only expected to recover in the second half of the year (2H19).

The local bourse has lost about 11.1% compared to a year ago and 14% since record level achieved in May 2018 last year. The FTSE Bursa Malaysia KLCI (FBM KLCI) yesterday slumped 8.56 points or 0.53% lower to close at 1,620.90 as selling of selected heavyweights continued amid further declines of the ringgit.

Analysts expect the downward trajectory to continue until 2H19 amid fears of stagnating economic growth and lack of clarity in government policies. The possible exclusion from a global government bond index has also dimmed prospects.

Investors were spooked by the FTSE Russell’s announcement that it is currently considering downgrading Malaysia on the FTSE World Government Bond Index (WGBI), which may exclude Malaysian government bonds from the index that may, in turn, spark a ratings downgrade.

Presently, the local bourse is the worst-performing equity market in the world. Meanwhile, regional markets like Singapore and Thailand are up 9.12% and 6.99% respectively, while Indonesia is 4.63% stronger despite its election period. But the drop has mainly been the fault of many large companies.

Despite the FBM KLCI’s dismal performance year-to-date (YTD), the FTSE Bursa Malaysia Small Cap Index has jumped 16% since the start of the year, while the FTSE Bursa Malaysia Mid 70 Index is up 9.42%.

Areca Capital Sdn Bhd CEO and ED Danny Wong Teck Meng said the ongoing weakness in the markets is due to investors being impatient for more clarity in the government policies.

Wong said the changes in leadership at selected government-linked companies (GLCs) saw several kitchensinking exercises as new GLC leaders sought to start afresh with clean books.

“Markets and the ringgit are likely to be better in 2H19 as you can already see more news from the government such as the revival of large infrastructure projects.

“Meanwhile, on the GLCs and large-caps, after the kitchen-sinking which resulted in bad quarterly results, corporate results should be able to drive share prices,” he told The Malaysian Reserve.

Corporate earnings for the first quarter of 2019 (1Q19) may not be as poor as the showing put up for 4Q18, but the rebound is also unlikely to be very strong, with a greater pickup more possible in 2Q results that will only show in 2H19.

“I look forward to a better 2H. Hopefully by then, there’ll be more clarity and market catalysts, and external issues like the US-China trade tensions will be resolved.

“I think this quarter will be a time to pick up some shares that have been badly beaten down but with fundamentals that are intact,” Wong said.

He added that the FBM KLCI has been mainly dragged by selected large-cap stocks, while the overall domestic equity market has been performing relatively well.

“The small- and mid-caps are doing quite well — typically construction mid-caps, some oil and gas counters and some exporters. If you take away certain large-caps, the market isn’t doing that badly,” he said.

Rakuten Trade Sdn Bhd in a note yesterday said the developments surrounding Malaysia and the WGBI could be the reason for the recent weakening of the ringgit to around RM4.13 against the US dollar from RM4.09 previously.

It estimates foreign funds to be holding around 13% to 14% of local bond value at nearly RM190 billion, of which around RM50 billion comes from the Malaysian Government Securities.