Finding the stocks to invest in a gloomy local market

Sectors like banking, O&G and construction could be the bright lights of a very sombre market


What are the possible saviours of a battered stock market which has lost billions in market value in just the last few weeks? And if you are a punter, which counters will you bet on?

Malaysia’s benchmark FTSE Bursa Malaysia (FBM) KLCI is currently the worst performer in Asia, recently slipping as much as 4% and about 2% lower compared to a year ago.

In contrast, equity markets of Malaysia’s northern and southern neighbours — Thailand and Singapore — are up by 6.61% and 3% respectively.

The Washington-Beijing trade spat is wiping out trillions in the world’s capital markets.

Some analysts had advised retail investors to stay away as US President Donald Trump’s rhetorics continue to rock capital markets.

The Malaysian Reserve (TMR) recently reported that foreign investors dumped a total of RM4.46 billion in local equities. Last year, Malaysia’s stock market value shrunk by RM270 billion, almost 20% of the country’s total GDP or more than the country’s total projected government operating expenditure of RM259.8 billion for 2019.

But analysts believed this prolonged drought would come to an end and the local market could rebound in second half of the year.

Sectors like banking, oil and gas (O&G), construction and consumer products could be the bright lights of a very gloomy market.

MIDF Amanah Investment Bank Bhd head of research Mohd Redza Abdul Rahman (picture) said the market will be supported by certain sectors, especially the heavyweights.

“If the banking sector is able to recover, it will highly likely be able to pull up the FBM KLCI, considering its big weightage in the index,” he told TMR.

He said lenders will go through a short period of adjustments following the Overnight Policy Rate (OPR) cut recently, and it is likely “to turn out well once it’s over and done with”.

Last month, the central bank slashed the OPR by 25 basis points to 3%, a move that was seen as a response to a weak economic outlook. The rate cut is expected to have an impact on lenders’ second quarter of 2019 (2Q19) earnings.

All the major lenders have released their financials for the January-March period. Public Bank Bhd, AMMB Holdings Bhd and BIMB Holdings Bhd showed an increase in earnings for the first three months of this year.

Hong Leong Bank Bhd, the fifth-largest lender by assets, posted a lower net profit for its 1Q19 by 8%. CIMB Group Holdings Bhd followed the similar declining trend by recording a 9% drop in its net profit.

Mohd Redza said the rate cut will help spur domestic spending, boosting the earnings prospects of consumer staples and discretionary sectors in the second half of 2019 (2H19).

The most expensive counter on Bursa Malaysia, Nestlé (M) Bhd, reported a 2% growth in its net profit last month. The stock reached an all-time high of RM150.60 per share in the period.

Fraser & Neave Holdings Bhd’s net profit rose by 13% to RM104 million in 2Q19, underpinned by higher sales.

Meanwhile, Mohd Redza said real estate investment trusts (REITs) are still a safe defensive bet.

“Investors can opt for the safest investment such as dividend yield sectors like REIT, considering its decent earnings so far. The increase in domestic spending will be good for REITs with exposure in shopping malls and logistic hubs,” he said.

Bursa’s REIT index has been among the stable indices, compared to the main KLCI index this year. Last year, the average yield of return for REITs was 6.24%.

“Currently, we are maintaining our KLCI target of 1,760 by year-end and remain positive on the market outlook for 2H19,” said Rakuten Trade Sdn Bhd VP for research Vincent Lau.

He said the construction and O&G sectors are expected to recover in the next six months, and the local equity market is bottoming at the current 1,600 level.

The government has kick-started various mega projects which include Bandar Malaysia, the East Coast Rail Link and the Mass Rapid Transit Line 3 projects, paving the way for local construction firms to bank on the multibillion projects.

Lau said small and mid-cap stocks are attractive, and advised investors to consider these segments.

“Amid the uncertainties, we are advocating a selective buy on weakness strategy,” he said.

The FBM Small Cap Index has dropped to 12,374 points and reached a year’s high of 13,809 points.

It is made up of companies within the top 98% of Bursa Malaysia, excluding the constituents of the FBM KLCI and FBM Mid 70 Index.

The plantation sector, however, continues to be a challenge, said Mohd Redza.

External pressure on crude palm oil (CPO) will continue to dampen the sector’s growth.

“Most research houses have downgraded a few plantation stocks, owing to the disappointing result and outlook,” he said.

Presently, the average CPO price stood at RM1,951 per metric tonne on the Bursa Malaysia Derivatives Exchange. Industry estimates are more bullish at RM2,200 to RM2,400 per metric tonne in 2019.

FGV Holdings Bhd posted a RM3.37 million loss for the first three months of this year.