FBM KLCI is pressed to find a firm footing following the US Fed’s decision in raising interest rates 

by ANIS HAZIM / pic MUHD AMIN NAHARUL

THE aggressiveness of the US Federal Reserve (Fed) in raising interest rates seven times in 2022 had caused downward pressure on the equity market. 

Consequently, FTSE Bursa Malaysia KLCI (FBM KLCI) was also pressed to find a firm footing following the US Fed’s decision. 

To note, the FBM KLCI was building an upward momentum at more than 1,600 points early last year, against the backdrop of recovering economy and corporate earnings. 

The equity benchmark dropped to beneath 1,500 points level in June 2022 and slumped further at below 1,400 points level in October 2022. 

Nonetheless, the impact was not confined to Malaysia’s equity market only as global markets were similarly impacted or even worse. 

According to MIDF Amanah Investment Bank Bhd (MIDF Research), FBM KLCI started the year on a positive note on the back of the reopening of the economy. 

“However, the aggressiveness of the US Fed this year has caused the performance of the FBM KLCI turning negative, where it is registering a 6.1% decline (as of Dec 5, 2022),” it said in its 2023 Market Outlook report. 

Moving into 2023, the research house expected external factors to continue to be an influencing factor for the Malaysian equity market. 

“We foresee a situation whereby the equity market would become more bullish principally due to the unwinding or subsiding pres- sure on required return, but equity valuation would continue to remain subpar relative to its historical range due to these limiting factors,” it added. 

Hence, MIDF Research has placed its FBM KLCI target for end-2023 at 1,700 points, which implies a price-earnings ratio (PER) of 15 times. 

Meanwhile, MIDF Research foresaw that there would be several concerns in 2022, namely the heightened risk of a possible US recession, a sudden drastic change to the unsettling situation in Ukraine and uncertainty surrounding the situation of China’s economy. 

“We expect the less hostile monetary environment to continue to be supportive of Malaysia’s equity market due to the alleviation of the valuation pressure, but its support would continue to remain subpar relative to its historical range due to these concerns,” it said. 

On earnings, the research house anticipated that it will remain buoyant this year, arguably predicated on the continuation of hitherto good earnings performance from last year.

“The consensus is currently projecting FBM KLCI earnings to grow 11.5% year-on-year (YoY) to 112.9 points in 2023. 

“If achieved, it would surpass the current record of 111.8 points registered in 2011 (based on Bloomberg data),” it noted. 

Meanwhile, all sectors (except plantation) are expected to show positive earnings growth as the aggregate earnings growth is forecasted at 12.2% YoY over the next financial year. 

“Financial services, consumer product and services (P&S), and telecommunications and media sectors are expected to contribute the largest quantum of incremental earnings. 

“Moreover, consumer P&S, transport and logistics and telecommunications and media sectors are anticipated to generate the highest growth percentages,” it added. 

However, plantation is forecasted to register negative earnings growth over the next financial year principally due to the expectation of softening crude palm oil (CPO) prices. 

“While it seems that global growth may face a slowdown next year, we expect that Malaysia’s domestic demand will provide support to the economy fuelled by continuous upbeat consumer spending, moderation in price pressures, further improvement in tourism-related activities and possible revival of infra projects,” it further said. 

Hence, MIDF Research expects that consumer-related companies, whether it is consumer staples, shopping-related real estate investment trusts (REITs) or automotive will be a beneficiary of consumer spending. 

MIDF Research is ‘Positive’ on automotive, banking, construction, consumer, healthcare, media, oil and gas (O&G), REITs and technology. 

The research house kept ‘Neutral’ on plantations, power, property, telecommunication and transportation, while ‘Negative’ on gloves. 

Among its top stock picks included Dialog Group Bhd, Bumi Armada Bhd, UMW Holdings Bhd, Fraser and Neave Ltd, Petronas Chemicals Group Bhd, PPB Group Bhd, Aeon Co (M) Bhd, Sunway Reit, Inari Amertron Bhd and QL Resources Bhd. 

On the other hand, Maybank Investment Bank (IB) Research anticipated market risk to decline in 2023, hence, placing its end-2023 FBM KLCI target at 1,660 points. 

“KLCI earnings growth is conversely set to accelerate to the mid-to high teens as the market moves beyond 2022’s twin drags of the one-off Cukai Makmur tax and gloves sector earnings collapse,” Maybank IB said in its Malaysia 2023 Outlook and Lookouts report. 

While fading reopening tailwinds and interest rate hikes will weigh on growth in 2023, the research bank said that market earnings expansion ex-gloves is nonetheless forecast to strengthen to 17.3% as Cukai Makmur expires. 

“Bank sector profitability continues to improve and is accelerating recovery at laggard sectors like casino-gaming and transport as well as aviation,” it said. 

Meanwhile, accelerated reopen- ing by China will boost trade, tourism and commodities demand and prices. 

Maybank IB was ‘Overweight’ on the financial sector, semiconductor, electronic manufacturing services, automotive, O&G, as well as renewables and healthcare. 

The research bank was ‘Selective’ on telcos, plantations, Reits, consumers, construction, utilities and aviation, while remaining ‘Sell’ on gloves. 

Among the top picks included Hong Leong Bank Bhd, RHB Bank Bhd, Alliance Bank Bhd, Allianz Bank Bhd, Inari Amertron, ViTrox Corp Bhd, Frontken Corp Bhd, Greatech Technology Bhd, CTOS Digital Bhd, Aurelius Technologies Bhd, VS Industry Bhd, Bermaz Auto Bhd, Yinson Holdings Bhd, Dialog and Hibiscus Petroleum Bhd.

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