Categories: MarketsNews

FBM KLCI to hit 1,620 points in 2024

However, the index still shows a YTD negative return of approximately 3% 

by RUPINDER SINGH / pic BERNAMA

IN 2023, the FTSE Bursa Malaysia KLCI (FBM KLCI) experienced contrasting performance in its two halves, driven by changing expectations of economic conditions. 

After concluding 2022 at around 1,500 points, concerns over inflation, financial sector instability and sovereign debt troubles led to a 9% decline (about 130 points) in the first half of 2023 (1H23). 

However, as it became apparent that these concerns were somewhat exaggerated, sentiment improved, and the FBM KLCI recovered, gaining around 5% in the 2H, surpassing the 1,400-point mark. 

Nonetheless, the index still shows a year-to-date (YTD) negative return of approximately 3%. 

In contrast, the FBM Small Cap Index performed better, yielding an approximate 8% positive return YTD. 

For 2024, Public Investment Bank Bhd Research (PublicInvest Research) expects market conditions to be better, underpinned by healthier economic growth domestically, a steadier earnings growth picture and traction from the various growth frameworks unveiled this year, among others. 

Expected monetary loosening in the US (and possible weakening of the dollar), in particular, may see capital repatriated back into emerging markets, it said in its recent market strategy report. 

Though the FBM KLCI (and the broader market) continues to struggle to break out of its range-bound trading band, PublicInvest Research suggests four considerations for greater exposure in the market. 

Undervaluation of the Ringgit 

PublicInvest Research highlighted a significant consideration in its market strategy, focusing on the undervaluation of the ringgit against the US dollar (USD/RM exchange rate). 

The assessment indicated that, since the unpegging in 2005, the ringgit is presently undervalued by approximately 30 sen relative to its fair value. 

The report drew attention to two notable periods of depreciation for the ringgit in 2014/2015 and 2021/2022. 

However, the key point of interest for PublicInvest Research is the divergence from the estimated fair value (FV) during these periods. The report suggests that understanding these occurrences is crucial for investors. 

The research house emphasised the historical pattern where periods of divergence, specifically in 2016/2017 and 2020/2022, have ultimately converged back to parity. 

Importantly, these convergence phases coincided with the FBM KLCI registering gains of 13% and 19.2% respectively. 

The report suggested that there is a historical correlation between the convergence of the ringgit to its FV and positive performance in the benchmark FBM KLCI index. 

Will history repeat itself? 

The report raised the question of whether we will witness a repeat of this historical pattern, especially considering that the ringgit is currently near its historical peak undervaluation of approximately 30 sen. 

PublicInvest Research did not make a definitive prediction but indicated that the prospects are encouraging. The possibility of a repeat is seen as promising, particularly in light of the potential repatriation of portfolio capital back to emerging markets in 2024. 

Relative Undervaluation of the Market

PublicInvest Research introduced a second key consideration in its market analysis, focusing on the relative undervaluation of the market. 

To assess this, the research house adopted a conservative approach by tracking market valuations since 1993, a period spanning major market-moving events such as the Asian Financial Crisis (1997/1998), the Dot.Com bubble burst (2000), the Global Financial Crisis (2008/2009), the European Sovereign Debt Crisis (2012/2013), and the Covid-19 (2020/2021). 

The valuation of the market was measured in terms of standard deviations (SD) from its long-term average. 

Currently, the market has slipped to 1 SD below its long-term average. 

PublicInvest Research provided context by highlighting that in the last 30 years, the market has only dipped to -3 SD during the Asian Financial Crisis and -2 SD pre-Global Financial Crisis, both of which were significant financial crises. 

In all other instances of negativity, the market has only weakened to -1 SD before subsequently rebounding. 

The report addressed the question of whether the market is on the precipice of another financial crisis. 

PublicInvest Research suggested that, in the near term at least, this does not appear to be the case. 

However, it cautioned that the possibility cannot be entirely discounted over the longer-term horizon. 

The research house point to growing debt levels (sovereign, corporate and household) as a potential concern, with significant financial implications. 

Despite this, Malaysia’s relative strength in its economic fundamentals is highlighted, 

positioning it favourably compared to its emerging market regional peers, even if not the most compelling in terms of valuation. 

This perspective gains significance in the context of the current period marked by ratings downgrades, where countries such as the US and China have already been affected. 

PublicInvest Research suggested that Malaysia’s economic fundamentals, though not the most compelling valuation-wise, provide a level of relative strength. This assessment became particularly relevant amid the ongoing economic challenges and uncertainties affecting global financial markets. 

Relative Strength of the Earnings Basket

PublicInvest Research introduced the third consideration in its market analysis, focusing on the relative strength of the earnings basket, both in the short- and long-term. 

Comparing the recently concluded quarter (3QCY23) to the immediately preceding one, PublicInvest Research noted a positive shift. 

In 3QCY23, the number of hits and misses in corporate earnings skewed more toward the positive side. 

Positive surprises were attributed to business-related improvements such as better-than-expected sales, while disappointments were a mix of poorer sales and elevated costs. 

Importantly, the report emphasises that earnings adjustments post-2QCY23 reporting were not as pronounced. 

This suggested that the improved performance in 3QCY23 is not simply the result of over-bearishness but rather indicative of genuine positive developments. 

Expected improvements in 2024 are anticipated to come from dissipating cost pressures. PublicInvest Research also delved into the market’s historical performance over the last 22 years (2001 to 2022), highlighting that, more often than not (13 of 22), the market has moved in step with the earnings growth picture.

This correlation has become more obvious in recent times, excluding the pandemic-affected years (2020 to 2022).

The report suggested that 2024 is not expected to be any different, emphasising the importance of the earnings picture in influencing market direction. 

While the earnings picture may not conclusively predict market direction, PublicInvest Research asserted one certainty — the cumulative earnings basket — in absolute terms, is at historical highs. 

This signified that corporate Malaysia remains strong. Consequently, any expected upward movement in the market is fundamentally supported by the robust state of corporate earnings. 

In essence, the third consideration underscores the positive short-term trend in earnings performance and highlights the historical correlation between market movements and earnings growth. 

The strong earnings fundamentals of corporate Malaysia are positioned as a key factor supporting the anticipated upward movement in the market in 2024. 

Relatively Robust Market Expectations

PublicInvest Research highlighted the optimism prevailing in the market based on the consensus one-year forward price targets of individual component members of the FBM KLCI. 

The expectation is that the benchmark index should track movements accordingly as stock prices approach these price targets. 

In this context, the report suggests that the FBM KLCI is anticipated to reach a level of 1,620 points by the end of 2024, with a margin of variability of +/- 5 to 10 points. 

With the market still a very trading-oriented one amid possible monetary policy “confusion” and limited fiscal assistance, PublicInvest Research continues to suggest accumulation on market weakness to ride on the recovery going into 2024. 

While optimism cannot yet be considered full-blown, it noted that conditions do appear to be better from what they were just six months ago. 

“While the relative undervaluation of the market and a reversion to the mean were the only key macro plays for 2H23, stronger economic growth domestically and its resultant effects on financial and capital markets will be an added positive for 2024. 

“This will be in addition to the relative undervaluation of the ringgit, continued undervaluation of the market, relatively steady corporate earnings picture amid relatively robust market expectations. 

“Our year-end 2024 closing for the FBM KLCI is 1,630 points based on ~15x (-1SD to the FBM KLCI’s short-term average) multiple to CY24 earnings,” the research house said. 

PublicInvest Research said its investment strategy focuses on companies with strong growth potential over multiple years to capitalise on the positive impact of improving global and domestic economic conditions. 

“Going into 1H24, we continue to believe in the prospects of CCK Consolidated Holdings Bhd, CIMB Group Holdings Bhd, Dayang Enterprise Holdings Bhd, Genting Bhd, Inari Amertron Bhd, IJM Corp Bhd and Uzma Bhd. 

“D&O Green Technologies Bhd, Mega First Corp Bhd and QL Resources Bhd improved outlooks, both included as suggested picks for 2024,” it added. 

PublicInvest Research is ‘Overweight’ in technology, construction and consumer sectors, while banking is expected to maintain a ‘Neutral’ stance with potential for positive developments in economic conditions and credit expansion. 


  • This article first appeared in The Malaysian Reserve weekly print edition
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