The country is not interest-rate sensitive unlike its peers, namely the Philippines, Indonesia and Thailand, says analyst

by MARK RAO/ pic by MUHD AMIN NAHARUL

MALAYSIA’S stock market could recover next year after a laggard 2019 performance if the interest-rate environment remains favourable and attractive to foreign investors.

Foreign shareholdings in Bursa Malaysia, especially for the index-linked stocks, are at a multi-year low. Foreign outflows totalled close to RM20 billion over the past two years, online equity broker Rakuten Trade Sdn Bhd said.

However, the current stance of foreign buyers indicates a low possibility of another massive outflow occurring, while a stable interest-rate environment could attract foreign funds back to local equities.

Malaysia is not interest-rate sensitive unlike its peers, namely the Philippines, Indonesia and recently Thailand, Rakuten Trade head of research Kenny Yee said.

“So long as our interest rate is maintained, yield is high and the yield differential between us and our regional peers (is attractive) — I think that should induce (in)flows of foreign funds,” he told reporters during a market outlook briefing in Petaling Jaya yesterday.

This will spill over into equities, provided that Bank Negara Malaysia (BNM) does not change interest rates too much, he added.

Any boost to local stocks would greatly benefit the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI), which is down 5.1% for the year-to-date and is Asia’s worst performing major stock gauge.

The current interest-rate differential between Malaysia’s Overnight Policy Rate (OPR) and the US federal funds rate is at 125 basis points to 150 basis points.

This comes after the US Federal Reserve cut interest rates three times this year alone, while BNM only lowered the OPR once. Foreign institutional funds made up less than 15% of the total volume traded on Bursa Malaysia in October this year, but an attractive interest differential could tempt foreign funds back to the market as they are perpetually on the hunt for yield.

“Like it or hate it, global fund managers hover around the region like vultures, looking for the best returns,” Yee said.

“This (stable interest-rate environment) will be a main attraction for foreign funds. That is why I think for us, hopefully there won’t be many (changes) to our interest rates unlike what happened to our neighbouring countries.”

Rakuten Trade predicts the FBM KLCI will close at 1,630 this year, before improving to 1,750 in 2020 based on a 16-times market price earnings (PE) ratio.

The year-end target would represent a 3.6% decline for the year, but position the index for an upside of 1.6% based on its last close of 1,604.36.

This is expected to be driven by some minor window-dressing from local funds over the remainder of the year, coupled with corporate earnings faring better than market expectations.

The forecast recovery in 2020, meanwhile, will largely be driven by foreign funds returning to Bursa Malaysia and improvements in corporate earnings, which dragged the market this year.

Earnings growth for the FBM KLCI should come in at 5.8% in 2020 from the forecast 3.3% contraction this year, supported by recovery in sectors such as banking and plantations.

The banking industry, which carries an approximately 30.8% index weightage, is expected to benefit from a steady OPR and the lower statutory reserve requirement threshold, as well as a pickup in construction-related financing.

However, Malaysian stocks will continue to experience volatility next year due to events in the US (vis-à-vis the US-China trade war) and the political unrest in Hong Kong.

“Volatility will still remain and we are seeing around 1,590 to be a very strong support level (for the FBM KLCI),” Yee said.

“Over the last two to three months, the FBM KLCI has been trading within a 20-point range — between 1,590 and 1,610 — a narrow band.”

Rakuten Trade is also predicting the ringgit to hover between 4.10 and 4.15 against the US dollar in 2019 before strengthening to 4.00 next year.