No respite for benchmark FBM KLCI in 2022

The market was hit by Covid-19 Omicron variant in January, Russia’s invasion of Ukraine in February, record-high commodity prices in March that led to inflation concerns

by RUPINDER SINGH

THE FTSE Bursa Malaysia KLCI (FBM KLCI) faced a series of negative events this year notably on concerns of the Ukraine-Russia war, rising interest rates and political uncertainty that led to the barometer index moving southwards in 2022.

Throughout the year without respite, the market was hit by negative news flow beginning from concerns over the outbreak of the Covid-19 Omicron variant in January, Russia’s invasion of Ukraine in February, record-high commodity prices in March that led to inflation concerns, an increase in Malaysia’s monthly minimum wage by up to 36% to RM1,500 in April, Overnight Policy Rate (OPR) hike of 25 basis points (bps) in May; and US Federal Reserve (Fed) raising its Fed Funds rate by 75bps in June — its highest in nearly 30 years — raising fear of the US recession risks.

Other episodes that dampened the market were from the political uncertainties namely the hung Parliament results post-15th General Election leading to the formation of a unity government for the first time in Malaysia’s history. Meanwhile, falling average selling price (ASP) for glovemakers led to a sharp correction in their share prices, and higher raw material costs and taxes.

On top of these, there was also a huge sell-off in the global markets in 2022 as markets adjusted for lower global liquidities and cut exposure to expensive stocks notably in the technology sector, which also affected sentiments in the Malaysian market.

In a strategy note released on Dec 9, CGS-CIMB Research Sdn Bhd said the KLCI briefly touched its year-to-date (YTD) high of 1,619 pts on March 3, before retreating to close the first half of 2022 (1H22) at 1,444 pts on June 30, which is near its year’s low of 1,431 pts set on June 23.

In the 2H22, the KLCI fell to anewlowof1,373ptsonOct13 before recovering. Overall, the KLCI fell 5.3%, or 79.35 pts, to close at 1462.55 pts on Dec 21, 2022.

For the first time since 2018, foreign investors emerged as the largest net buyers of Malaysian equities, with RM4.9 billion up to November this year. This suggests that they are starting to see value emerging in Malaysian equities.

“We noticed from funds tracked by S&P Global Market Intelligence that the largest foreign buyers in Malaysia for 2Q22 were the foreign index funds — namely BlackRock Fund Advisors, The Vanguard Group Inc, BlackRock Asset Management North Asia and Invesco Capital Management,” the research house said.

To recap, foreign investors were the most aggressive net sellers in the Malaysian equity market between 2018 to 2020 on concerns over political uncertainty and the Covid-19 pandemic.

Trading Activities in KLCI Declined Further in 2022

Trading volumes and values in Bursa Malaysia fell YTD as trading interest in the market declined on concerns of Ukraine-Russia war, rising interest rates and political uncertainty.

There was lower interest from retailers, who may have opted out of the market following the sharp correction in the glove makers and technology companies’ share prices, as well as their weaker YTD performances.

“We noted that all key investor groups recorded lower trading activities YTD,” said CGS-CIMB.

Average daily trading volumes and values fell by 48.6% and 39.9% respectively to three billion units and RM2.2 billion respectively from Jan 1 to Nov 30, 2022. In comparison the average daily trading volumes and values stood at 5.8 billion units and RM3.7 billion in 2021.

From Jan 1 to Nov 30, the trading value for retail investors was RM230 billion, 60.4% below the RM581 billion recorded in the same period a year ago.

KLCI Outperformed All

Up to Dec 9, all key indices in Bursa Malaysia posted negative returns due to lower interest from retail investors and net selling by local institutional investors.

The KLCI index, which represents the top 30 largest market cap stocks in Bursa Malaysia, outperformed the FBM Top 100, FBM Emas and FBM Hijrah Shariah. This represents the second consecutive year where the KLCI index has outperformed these indices.

The KLCI gain was boosted by the outperformance in the finance sector, which accounted for 42% of the KLCI’s weightage.

The two shariah indices, namely FBM Hijrah Shariah and FBM Emas Shariah, posted -9.5% and -12% YTD returns respectively, under-performing the KLCI’s -5.8%. This was due to the sharp correction in the glove and technology sectors.

Meanwhile, the FBM ACE market also underperformed the KLCI due to less retail interest in the ACE market and profit-taking activities.

The FBM Small Cap index, however, outperformed the KLCI with a lower decline of 3.4% YTD, due partly to improved share price performance from the 60 listed companies that participated in the Bursa Research Incentive Scheme in March 2022.

Only 5 Sectors Delivered Positive Returns YTD

Out of the 13 Bursa sectoral indices, only five posted positive returns as at Dec 9, 2022. However, the majority, or eight sectors, outperformed the KLCI YTD, while five underperformed.

Also, key to note is the significant outperformance of the energy and finance sectors relative to the other sectors. To put things into perspective, the energy sector registered YTD returns of 10.5% (versus the KLCI’s -5.8%) due to improved earnings prospects of energy players on higher oil prices.

The finance and plantation sectors, in second and third places, respectively, in terms of returns, trailed the market leader with single-digit gains of 6% and 2.7%.

Banks are expected to benefit from the rate hike cycle, while the plantation sector gained from improving crude palm oil (CPO) prices due to disruption to the sun oil supplies from Ukraine.

Another interesting point to note is that the property index is on track to post five consecutive years of losses, which is unprecedented, suggesting that market sentiment for the sector is low.

Technology, Healthcare Key Drag to KLCI

The technology sector was the worst-performing sector YTD due to concerns of stretched valuations, slower economic growth and rising interest rates.

Healthcare was the second worst-performing sector YTD due to the sharp correction in large glove makers’ share prices as a result of low ASPs and overcapacity issues.

14 of the Top 30 Stocks Delivered Positive Returns

CGS-CIMB noticed that only 14 out of the 30 stocks in the KLCI posted positive returns YTD.

The best-performing stocks were Digi.Com Bhd, Sime Darby Plantation Bhd and Hong Leong Bank Bhd, which registered gains of between 11% and 35%.

The strong share price performance (+35.3% YTD) by Digi was partly driven by potential synergies from the Celcom-Digi merger.

Sime Darby Plantation’s share price recovered 15.7% on better-than-expected CPO prices and expectation of potential resolution to allegations of forced labour at its estates.

Hong Leong Bank’s share price outperformance could have been driven by talks of a potential merger.

The worst-performing stocks in the index YTD were Top Glove Corp Bhd, Hartalega Holdings Bhd and Inari Amertron Bhd, which fell by 32%-72%. The selling in the glovemakers’ shares was due to the sharp fall in ASP for gloves, as a result of softer demand and a sharp rise in global glove production capacities. The sell-off in Inari’s share price was due to concerns of its high valuations and slower growth.

Malaysia Worst Performer Against Regional Peers

Malaysia was the worst performer YTD among the MIST (Malaysia, Indonesia, Singapore and Thailand) markets, followed by Thailand, Indonesia and Singapore which was the best performer.

Singapore and Indonesia posted positive returns compared to Thailand’s and Malaysia’s single-digit negative returns of 2.1% and 5.8%.

The negative returns generated by the KLCI were due mainly to the sharp falls in the glove makers’ and technology companies’ share prices. However, all the Asean markets outperformed the MSCI AC Asia ex-Japan, which generated 19.5% losses YTD.

Currency-wise, all the MIST market’s currencies depreciated against the US dollar YTD. The Indonesian rupiah was the worst performer (-8.5% YTD against the greenback), followed by the ringgit (-5.4% YTD) and the Thai baht (-4.4%). The Singapore dollar was the best performer as it depreciated by only 0.4% YTD.