Can 2Q corporate earnings lift the barren market?

Research houses are not expecting a huge change, with many analysts already projecting a single-digit growth


THE second-quarter (2Q) corporate earnings are not expected to provide a lift to the main index as profits will fall short of targets, but selected stocks may have enough steam to power the barren market.

Analysts generally do not expect corporate results to reverse after five disappointing quarterly earnings and pull the main index which had just came off from being the worst major equity market in the world.

The index, which tracked the performance of 30 heavyweights, is still 1.28% lower from its peak this year. It dropped to lows last seen four years ago. However, it recovered from a low of 1,572.03 points in May.

Companies’ disappointing performance in 2018 continued to haunt the market in 2019. In the final three months of 2018, corporate earnings were 15.3% lower compared to the same period in 2017. For the full year, corporate earnings contracted 3.3% against the 2017 figures.

Corporate earnings for the first three months of this year have not brought the cheers to investors as foreigners dumped local shares in search of other lucrative markets.

Research houses are not expecting a huge change in corporate earnings in the 2Q, with many analysts already projecting a single-digit growth of 3% to 5% for the year.

Despite the poor corporate earnings in the first half (1H), MIDF Amanah Investment Bank Bhd Research (MIDF Research) has placed a target of reaching the 1,720-point level by year-end, with the recovery of banking stocks that would raise the main FTSE Bursa Malaysia KLCI (FBM KLCI).

The banking stocks, which comprise seven firms in the 30-strong FBM KLCI, were among the worst-performing counters as billions in market capitalisation disappeared.

The country’s largest lender, Malayan Banking Bhd, lost some 4.78% or RM5 billion in value in the first six months of the year, while CIMB Group Holdings Bhd’s market value fell by 4.17% or RM2.28 billion to RM52.33 billion.

“The concerns, especially on the banking sector from earnings downside following the Overnight Policy Rate (OPR) cut, and also on possible downgrade from the world bond index, as well as the inclusion of Malaysia in the currency manipulator list (due to our trade surplus with the US), has resulted in the banking stocks being battered down.

“However, post rate cut, we had seen a drastic improvement, for example in loans growth, coupled with the strength of its asset quality,” said MIDF head of research Mohd Redza Abdul Rahman.

Last week, Bank Negara Malaysia (BNM) maintained the OPR at 3%. In May, the central bank slashed the rate by 25 basis points to 3%, the first cut in three years.

“The local stock exchange will test the 1,700-point level sometime in August as the results for banks will come out,” he said to The Malaysian Reserve (TMR).

Others believed the local stock market has hit its bottom and could only get better after the drop in May.

Rakuten Trade Sdn Bhd VP of research Vincent Lau believes the worst is over for the local stock market.

“The worst has passed when the FBM KLCI hit a low of 1,572.03 and has staged a strong rebound to the current level. The FBM KLCI is likely to test the 1,700 level soon,” he said, adding that Malaysia is seeing the return of foreign investors into the equity market, although on a smaller scale.

MIDF Research in its report said foreign fund managers bought net RM134.6 million worth of stocks in June, the first monthly net inflow in five months.

But the equity market’s rise and fall, and valuations are largely tied to earnings prospects, something which has dismayed investors in the last few quarters.

Rakuten Trade head of research Kenny Yee said corporate earnings are expected to grow slower in the 2Q and most analysts are cautious of their estimates. He said the external impact to the local market will be muted and the stock market might see a flat growth until year-end.

“I don’t think we will see surprises in 2Q corporate results, but regardless, I believe the local stock market will recover in 2020,” he told TMR.

Mohd Redza said some sectors, namely industrial products and healthcare (gloves), are likely to do better in the 2H of the year.

The plantations, property and media sectors will continue their downtrend mode. Crude palm oil price continues to show weakness, unsold properties remain high and media companies struggle to gain on advertisement sales.


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