Stock market recovers from 1H slump

This is attributable to the revival of mega projects, inflow of foreign funds and a truce in the US-China trade war


THE worst may be over for Malaysia’s stock market as it gained some 110 points or 7% since hitting a four-year low of 1,572 points on May 14.

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) closed at 1,682.53 points last Friday, fractionally below the 1,690-point level where it began the year, but remains the worst performer against its regional peers in the first half (1H) of 2019.

The market, which was described as the least loved earlier in the year, is staging a rebound on expectations of a stronger economy in the 2H — attributable to the revival of mega projects, inflow of foreign funds and a truce in the US-China trade war.

“Indeed, we have passed the worst and now (we are) on the road to recovery,” Rakuten Trade Sdn Bhd research VP Vincent Lau told The Malaysian Reserve.

A check on Bloomberg shows that the index had declined 0.48% year-to-date (YTD), and is trading at a price-to-earnings ratio of 21.3 on a trailing basis and 17 times the estimated earnings of its members for the coming year.

The index’s dividend yield is 3.37% on a trailing 12-month basis and its 30-day price volatility rose to 7.19% compared to 7.11% in the previous session and the average of 7.99% over the past month.

Affin Hwang Investment Bank Bhd noted that YTD losses on the FBM KLCI have narrowed, largely led by expectations of the US Federal Reserve (Fed) easing and a potential resolution of global trade tensions.

However, the gains remain at risk as corporate earnings revisions remain negative, and this trend may sustain if trade tensions persist, leaving limited ground for the FBM KLCI to trade above its current price earnings multiple of 18 times its historical mean.

“We favour a shift into defensive names with sustainable yields, given that the interest-rate upcycle has passed, while we steer away from cyclicals. We remain neutral on the FBM KLCI with a year-end target of 1,679 set at 18 times 2019 estimate earnings per share,” the bank noted in a release last Friday.

FSMOne Research said over the first four months of 2019, Malaysia’s small-cap sector — as represented by the FBM Small Cap Index — has outperformed the FBM KLCI significantly by more than 15%.

However, due to the escalated US-China trade tensions, the small-cap counters which are generally high risk in nature experienced a rather sharp decline of about 7.9% in May, while the FBM KLCI delivered a positive return of 0.5%.

“Given that the small-to mid-cap companies are — by their very nature — high risk, the segment could be very volatile if there is any further escalation in trade tensions.

“As such, investors could look to invest more when markets experience irrational sell-offs despite the small caps’ sound fundamentals, moving forward,” the online unit trust sales platform stated in a recent report.

The recovery in the market has benefitted oil and gas (O&G) downstream player KNM Group Bhd, which saw the highest gain YTD whereby its share price appreciated by a staggering 294%.

Its stock closed at 31 sen last Friday from eight sen a year ago, on news of a RM36 million contract award in Egypt.

KNM was the most actively traded stock on Bursa Malaysia last Friday with 120.65 million shares traded. The counter’s trading volume is higher than its 200-day average volume of 18.2 million shares.

The company secured an air-cooled heat exchangers contract worth €7.75 million (RM36.14 million) from Technip Italy SpA.

Prior to this, on May 27 this year, it secured three contracts in Vietnam, Belgium and Johor worth RM97.72 million combined.

The group is principally engaged in the manufacturing of process equipment and turnkey solutions catering to international O&G, petrochemicals, energy and minerals processing companies and global engineering contractors.

Another major gainer was cement maker Lafarge Malaysia Bhd, currently trading at RM3.52 apiece after recording a 95% increase in its price. It even peaked to RM4.34 on June 13 this year.

The stock’s market capitalisation grew by almost RM2.2 billion over the last six months on the entry of a new controlling shareholder and the revival of major infrastructure projects in the country.

For context, the Bursa Malaysia Construction Index has grown by about 37% YTD.

YTL Corp Bhd, via its cement arm YTL Cement Bhd, has acquired LafargeHolcim Ltd’s entire 51% stake in Lafarge Malaysia for RM1.63 billion.