Rakuten Trade: Look after domestic economy first to lure foreign investors


THE government must ensure that domestic economic growth remains strong to make the economy resilient to external headwinds, said Rakuten Trade Sdn Bhd head of research Kenny Yee (picture).

“We will have to look after ourselves first (domestically) and when a nation is doing well, it is only natural for foreign investors to buy into Malaysian stocks,” he told reporters during Rakuten’s second half of 2019’s market outlook briefing.

Yee said from the third quarter 2019 (3Q19) onwards, foreign inflows are expected after the outflows were seen between February and May this year.

“Foreign outflows have tapered off and foreign investors are returning albeit at a slow pace to take advantage of the cheap ringgit and reasonable valuations” he said adding, year-to-date (YTD) the local market has witnessed a foreign net outflow of RM4.71 billion.

The reigniting of the US-China trade tensions last week resulted in foreign funds selling RM601.2 million worth of local equities over the shortened trading week, the largest weekly foreign net outflow in 11 weeks, Bursa Malaysia data reveals.

Rakuten believes the index-linked blue chips are ripe for the picking as most that are owned by foreign funds are now trading at reasonable levels.

“Recent liquidity on small and mid spaces should encourage more market participation,” Yee noted.

He said the revival of major infrastructure projects such as the RM44 billion East Coast Rail Link and development spending by the government is a massive boost to the construction sector.

“Another good thing is that Chinese money will return as these projects are reinstated,” he said, adding that the revival of the RM150 billion Bandar Malaysia project would further strengthen the country’s economy and in turn cushion it from external uncertainties.

Yee said the sell-off on the local stock market has allowed better value to emerge and foreign funds to take advantage of cheap ringgit and reasonable valuations.

The benchmark FTSE Bursa Malaysia (FBM) KLCI is down 3.1% YTD and trades at an estimated price earnings ratio (PER) of 15.5 times compared to its historical 18 times.

The FBM KLCI closed 16 points or 1% lower at 1,610 points yesterday on bearish investor sentiment due to fear for the global economy due to the rising US-China trade tensions.

There is a possibility of further downside in the coming months if the domestic economy weakens and hits corporate earnings, according to Yee.

Rakuten has lowered its corporate earnings growth forecast by 0.5% from a 2.3% growth forecast earlier on expectations of a negative performance from the plantation sector.

“The upcoming corporate earnings is expected to dip marginally but we expect calendar year 2020 to be a better year with a growth of 6.1%,” Yee said.

This has led to a lowering in Rakuten’s FBM KLCI year-end forecast target from 1,760 points to 1,720 points based on 16 times market PER. He, however, expects the ringgit to strengthen against the US dollar to around RM4 level this year.

Yee believes another major domestic catalyst for the local market would be mergers and acquisitions (M&A).

“The ongoing proposed merger talks between Axiata Group Bhd and Norway’s Telenor ASA, if finalised, should pave the way for more M&A activities.

“A Axiata-Telenor merger could threaten other telco’s position if a similar move is not adopted to at least expand regionally,” Yee said.

He reckons that M&A would not be isolated to the telecommunication sector and could spill over to the banking sectors as well.

“Local banks have reached their saturation point and need to expand their horizon regionally and to counter the imminent digital banking wave,” Yee said.

If such M&A takes place, it should be powerful catalysts for the local bourse as per the banking consolidation phase during the 2006/07 period, Yee added. Telco earnings however are expected to deliver negative growth this year.