FBM KLCI expected to hit 1,870 this year

Corporate earnings will not be affected by the 2nd round of MCO and is expected to register a 38.7% growth


THE FTSE Bursa Malaysia KLCI (FBM KLCI) is set to hit a high of 1,870 this year on the back of solid earnings growth, return of foreign funds into the market and strong retail participation.

Rakuten Trade Sdn Bhd head of research Kenny Yee said corporate earnings will not be affected by the second round of the Movement Control Order (MCO) and is expected to register a 38.7% growth this year.

“There would not be any more adverse impacts on corporate earnings going forward. We have undergone the first round of MCO last year, in fact, we are now seeing the fourth-quarter (4Q20) earnings charting growth,” he said in a briefing yesterday.

Among the sectors that will contribute to earnings growth this year are manufacturing, which is estimated to record a 90.6% growth, inclusive of earnings from rubber glove stocks, banking at 22.9% and plantation at 13.1%.

On foreign shareholding, Yee said it still remains low at 11.91% as at last month compared to 20% in 2017.

However, the steady level of foreign shareholding for the past months illustrated absence of massive foreign outflows. Total foreign outflow last year stood at RM24 billion.

Yee noted that the price-to-earnings ratio (PER) for Wall Street have seen an expansion.

He cited the Dow Jones Industrial Average as an example where it recorded 28 times PER valuation year-to-date (YTD) compared to 21 times last year and 16 times in 2015.

Nasdaq’s PER valuation stands at 66 times YTD versus 56 times and 31 times in 2020 and 2015 respectively.

“Sitting on current valuations, we believe Wall Street is highly susceptible to the slightest of negative news and foresee high volatility ahead.

“Thus, we should see some of these funds flow into emerging markets, especially Asia. Though Malaysia is not in the premier league, we reckon we will benefit from the spillover effects,” said Yee.

Rakuten expects the ringgit to trend between the 3.80 and 3.90 levels against the greenback this year.

Commenting on retail participation, Yee said there is a return of retail presence as the average participation had slightly increased in February to 39.3% from 38.5% last month. The average retail participation came in the highest in August last year at 43.2%.

“I hope we will see a high as per last year, but I think because of the short-term mode most investors have now, that would be the main headwind for the small-cap companies,” he said.

Yee added that Bank Negara Malaysia will likely maintain the Overnight Policy Rate (OPR) at current levels since the country’s economy is gearing towards recovery from the economic downturn last year.

He said a slash in the rate may induce a boost in the stock market, but the cut in OPR is generally aimed at helping the public and economy amid turbulent times.

“This time around, since we are in a recovery mode, I would not expect the central bank to cut the OPR,” he said.

At the Monetary Policy Committee meeting last month, the central bank held its benchmark policy rate steady at 1.75%, as it anticipates economic improvement in 2Q21.