by S BIRRUNTHA / Pic by TMR FILE

CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) expects the market to stay volatile in the second half of the year forecast (2H22F), with some potential catalysts for the market.

Analysts Ivy Ng Lee Fang and Nagulan Ravi said they see upside from a potentially stable political environment in Malaysia after the general elections, the return of foreign workers, better-than-expected tourist arrivals, easing inflationary pressures, a resolution to some of the environmental, social and governance (ESG) concerns, a market-friendly Budget 2023 and return of strong net buy flows by local institutional investors.

They also believe the market sentiment to remain weak with downside risks in the third quarter of the 2022 forecast (3Q22F), as the market attempts to price at the peak of US interest rates.

“Thereafter, the market could be range-bound and rebound if concerns over rate hikes or US recession risks subside. This could offer opportunities for investors looking for bargains.

“Overall, we expect the market to stay volatile in 2H22F,” the analysts said in a note today.

Meanwhile, CGS-CIMB Research also projects the FTSE Bursa Malaysia KLCI (FBM KLCI) earnings to fall 0.1% in 2022F and rise 10.7% in 2023F.

The analysts noted that this lowers the research house’s end-2022 FBM KLCI target to 1,506 points from 1,568 points, on an unchanged 12.9 times target price-earnings (P/E).

They also added that it lowered the FBM KLCI earnings to reflect its earnings downgrade for Top Glove Corp Bhd and MR DIY Group (M) Bhd.

“We advise investors to take shelter in sectors with defensive earnings (utilities, telco, healthcare, consumers) and high dividend yields.

“We also like banks as beneficiaries of rising interest rates. The seven themes for 2H22F are beneficiaries of rate hikes, beneficiaries of weaker ringgit, high dividend yielders, beneficiaries of the 15th General Election, value plays, ESG picks, and ESG and Shariah picks.

“We retain RHB Bank Bhd, MR DIY and Genting Malaysia Bhd as our top three picks,” they said.

Commenting further, the analysts said FBM KLCI’s performance in 1H22 was below its expectations as rising inflation pressures, more substantial interest rate hikes, a slowdown in China’s economic growth and escalating sanctions related to the Russian invasion of Ukraine set back expectations of a recovery in corporate earnings in 2H22F.

On top of this, they said Malaysian corporates continue to face challenges from higher wages, delays in the arrival of foreign workers and regulatory risks.

This, coupled with the recent sharp fall in commodity prices, raised earnings risks and led to a de-rating in FBM KLCI’s P/E multiple to two standard deviation (SD) below its three-year historical mean P/E.

Additionally, the analysts added that it tracked previous market downturns to gauge the downside risks to FBM KLCI should the global economy fall into recession.

They said that based on CGS-CIMB Research’s assessment, there are potential earnings downside risks of 19.4%/17.3% to its current 10.7% 2023F FBM KLCI earnings per share growth forecast if the earnings risks resemble those of the global financial crisis/Covid-19 periods (-8.7%/-6.6%).

“Applying this to our target P/E of 12.9 times gives us a lower FBM KLCI target of 1,213/1,245 points.

“If we were to widen the P/E discount to three SD from historical average P/E against our existing 2023F earnings projections, we arrive at an FBM KLCI target of 1,432 points,” they added.

At 12.30pm today, the FBM KLCI dropped 5.51 points to 1,420.28 from Friday’s close of 1,425.79.