Global events to weigh on KLCI

MIDF Research is optimistic that the US-China trade war will de-escalate


MIDF Amanah Investment Bank Bhd (MIDF Research) said the heightened trade war, geopolitical uncertainties and slowing China economy would force a revision of the main index year-end target of 1,720 points.

“The US Federal Reserve is expected to be less aggressive with regard to its monetary stance this year, which may be positive to emerging market currencies (including the ringgit), as well as to commodity prices.

“Moreover, the slowing China’s economy may prompt more stimulus measures (both monetary and fiscal) by the local authorities with positive spillover effects to the broader region,” MIDF Research said.

The investment bank is optimistic on the prospect of de-escalation of the ongoing US-China trade spat as both parties are seen to be seeking acceptable solutions.

“Domestically, the macro picture remains healthy with GDP growth expected at 4.9% this year, while corporate earnings growth at circa middle single-digit,” it added.

The FTSE Bursa Malaysia KLCI (FBM KLCI) has been on a gradual uptrend for the first two months of the year where it hit 1,731 points on Feb 21 before trending down thereafter.

Nevertheless, MIDF Research said the year-to-date (YTD) total overall market volume is higher by 3.6% at 2.64 billion shares a day compared to what was seen for the whole of 2018.

It added that as of Aug 5, 2019, the FBM KLCI lost 4.7% so far for the year amid continuing foreign net outflows affected by ongoing external developments which are also impacting other global markets.

“Earnings of the FBM KLCI are expected to grow by 6.3% year-on-year in the financial year 2019 as per the Bloomberg consensus,” the research read.

The FBM Small Cap Index and FBM 70 have substantially outperformed the benchmark index on a YTD basis, recording gains of 15.8% and 8.1% respectively.

MIDF Research said nine out of 13 sectors on Bursa Malaysia have recorded a YTD increase with construction, energy and telecommunications leading gainers, advancing by more than 10%.

The bank said it is not a surprise that the advance in the FBM Small Cap Index and FBM 70 were mainly due to construction stocks.

For example, nearly half of the top 10 gainers in the FBM Small Cap Index and FBM 70 were construction companies.

On the other hand, YTD decliners were led by the financial services sector with an 8.5% decrease.

MIDF Research said the other two major laggards were healthcare and plantation, which declined by 4.5% and 4.2% respectively on a YTD basis.

“With the FBM KLCI having seven banks as their constituents which are also heavyweights, the drop of the FBM KLCI was inevitable,” it added.

However, MIDF Research remains positive on banks.

It noted that banking income performance in the first quarter of 2019 has been slightly muted due to net interest margin (NIM) compression, which came mostly from deposit competition and may be exacerbated in later quarters by the Overnight Policy Rate (OPR) cut.

“The impact of the OPR cut to NIM will normalise as deposits were also re-priced lower. Besides, we believe that there are still positives for banks such as the downtrend of expenses and the low credit cost. This should be able to alleviate the weakness in income.

“Hence, we maintain our ‘Positive’ view on the sector as we are still cautiously optimistic of the overall banking sector. As such, it is more tactful to view the local bourse on a sectoral level rather than an index level to generate returns,” MIDF Research said.