Equity market still hesitant despite improved corporate earnings

The catalyst to the short-term market performance is more towards investor sentiment, MIDF Research says 


THE local equity market has been rather hesitant to rise in tandem with the improvement seen in corporate earnings, domestic Covid-19 situation and the reopening of the economy. 

MIDF Amanah Investment Bank Bhd (MIDF Research), in a report yesterday, stated that the catalyst to the short-term market performance is less related to earnings and other hard fundamentals but more to investor sentiment. 

“In this regard, market sentiment has been in the doldrums during the past months due to several factors namely, expectation of US Federal Reserve monetary tightening, intermittent worries over contagion risk of further weakness in China property market and perception of heightened policy risk. 

“Presently, the market sentiment is further tampered by the emergence of Omicron, the latest Covid- 19 variant of concern,” it said. 

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) fell below the 1,500-point level this week but managed to close the trading week at 1,501.7 point after the new Covid-19 variant signals a potential synchronised global slowdown if lockdowns become the norm again in the near term. 

Despite December being a traditionally positive month for the equity market, MIDF Research expects its short-term upside may be capped at the recent peak of 1,600 points. 

The firm slashed its year-end target for the FBM KLCI to 1,600 from the previous 1,650 points. 

It noted that the aggregate reported earnings of the FBM KLCI’s 30 constituents tapered to RM15 billion in the third quarter of 2021 (3Q21), contracting 16.5% quarter-on-quarter but grew 18.8% year-on-year. 

“The aggregate reported earnings figure requires some adjustments for the sequential and on-year growth numbers to reflect a fairer picture of the benchmark’s earnings performance. 

“In this regard, the aggregate normalised 3QCY21 earnings of FBM KLCI’s 30 constituents after adjusting for non-operational items (principally, exceptional expense in 3Q21 amounting to RM1.3 billion incurred by CIMB Group Holdings Bhd) came in at RM16.6 billion,” it said. 

The percentage of companies under the firm’s coverage that registered earnings above its expectations increased to 21% in 3Q21 compared to 20% in 2Q21. 

Conversely, the percentage of negative surprises declined to 38% in 3Q21 from 39% in 2Q21. 

“It is noteworthy that the health- care sector registered the highest percentage of positive surprises at 57% (4/7) of stocks under our coverage while the technology sector led the percentage of underperformers at 80% (4/5) of companies under our coverage,” the broker noted. 

Construction, industrial products and services, technology and utilities were the sectors which recorded improved total earnings (as reported) in 3Q21 when compared to both the preceding quarter and corresponding period last year. 

Consumer products and services, energy, financial services and real estate investment trust were the sectors which registered both negative sequential and on-year earnings (as reported) growth per cent- ages in 3Q21, the MIDF Research report stated. 

Public Investment Bank Bhd (PublicInvest) noted that the 3Q21 reporting cycle reflected the susceptibility of Malaysian companies to a nationwide lockdown. 

The investment bank said corporate earnings for 2022 are anticipated to contract 3.3% partly as a result of the prosperity tax while some are business-related, while earnings for 2021 are expected to grow relatively robust at 54.9% on the back of upward adjustments on certain bank and plantation-based earnings. 

“Encouragingly, however, it should be noted that the larger companies appeared to be a little more resilient with the banking, plantation and power sectors exceeding expectations somewhat. 

“Earnings adjustments, though quite many this time round, affected the smaller (and largely non-market moving) companies. Expectations of a more robust recovery in the coming quarters could be on hold as companies continue to work through effects of movement restrictions and delayed economic sector reopening, as well as capacity constraints,” it said. 

The firm maintained its year-end target for FBM KLCI at 1,590 points although current sentiments suggest the index to close at 1,550 points. 

The market is also expected to continue to be trading-oriented. 

“It is still encouraging to note that foreign investors have been net buyers in recent months, suggest- ing regional investor flow potentially picking up in momentum as the country’s growth prospects continue to strengthen, the above-mentioned ‘negativities’ notwithstanding,” it added.