Construction, E&E and O&G sectors to drive FBM KLCI in 2020

The country’s net foreign fund outflow stands at around RM10b, while the FBM KLCI has declined by 7.6%


THE construction, electrical and electronics (E&E), and oil and gas (O&G) sectors are among the sectors expected to attract investor interest next year following the massive foreign capital outflow from the local bourse experienced throughout this year.

The country’s net foreign fund outflow stood at around RM10 billion year-to-date (YTD), while the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) has declined by 7.6% YTD.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid (picture) said the commencement of the Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang and other mega project developments are set to support the O&G, as well as construction counters, while E&E counters are expected to be bolstered by an improved semiconductor demand.

“This year, we are still looking at the FBM KLCI ending at 1,600 points. Next year, we are looking at 1,650 points. Why better? Because we notice equity markets generally move ahead of the economy for about six months,” he told reporters after presenting the bank’s 2020 economic outlook briefing in Kuala Lumpur yesterday.

He added that when the economy is weak, the central bank’s bias would be to cut rates and the government to spend, to boost aggregate demand, and that political stability and clarity on mega infrastructure projects can be the “wow” factors that could boost FBM KLCI performance and the ringgit next year.

He said projects like the East Coast Rail Link and high-speed rail contract awards and implementation, as well as clarity on the prime minister’s power transition, would help drive the improvement of investors’ sentiment.

Mohd Afzanizam said Bursa Malaysia and the ringgit have been impacted by risk aversion amid cautious sentiment among investors, both locally and overseas.

He expects banking counters, which account for one-third of the 30 counters in FBM KLCI, could drag the performance of the local bourse down if Bank Negara Malaysia (BNM) cuts its Overnight Policy Rate (OPR) next year, as lower net interest margins are expected from the move.

Bank Islam expects BNM to slash its OPR by 25 basis points to 2.75% from the current 3% next year, while the ringgit is expected to hover between 4.20 and 4.30 in 2020 as risk aversion continues.

The bank has also forecast Malaysia’s GDP growth to mode-rate to 4.3% next year compared to the 4.5% growth estimated this year.

“The growth trajectory would slow further in 2020 as consumers are likely to be careful in their spending plans, while businesses would remain cautious as the outlook for the final demand looks increasingly challenging,” he said.

Asked if a stimulus is needed to support the country’s economic growth, Mohd Afzanizam said he believed the government had mulled the move in Budget 2020.

“It has been reflected in Budget 2020 to some degree because the government is looking at a wider fiscal deficit target of 3.2% next year and has allocated RM56 billion for development expenditure, which is higher from the average of RM46 billion spent annually between 2010 and 2018.

“In that sense, the intention is there to pump up the economy. It is just that, perhaps it depends on the evolving outlook next year. So far, the numbers are okay,” he said.

On the global front, Mohd Afzanizam said Malaysia has the capacity and capability to defend its economy against the backdrop of the recession that could hit the US in 2021.

“We have experienced a few recessions in the past. And typically, the first line of defence has always been the monetary policies. The central bank has more room to cut if there is a need to do that.

“In terms of fiscal policies, if you look at the credit default swap spread, they can actually pump up the spending,” he said.

He added that the government could resort to a cut in the Employees Provident Fund contribution rate to spur private consumption spending as noticed in 2001, 2003, 2009 and 2016.

Mohd Afzanizam said based on studies and observations, once the yield curve inverts in the US, it will take about 12 months to 27 months before the actual recession occurs. “We should be wary in terms of the outlook next year, especially in the context of the US-China ongoing trade war,” he said.