THE outlook for Malaysia risk assets remained positive on brighter macroeconomic prospects, with corporate earnings having turned the corner, according to an equity strategy report.
“We reiterate our optimism on the outlook for equities that is based on the anticipated improvements in the global macroeconomic outlook, the peaking in the monetary tightening cycle and potential reversal, the expected US dollar easing, reversal of portfolio flows into emerging markets, the nascent China recovery story, ameliorating domestic political risks and anticipated gradual implementation of the fiscal reform agenda,” according to RHB Investment Bank Bhd (RHB Research) in a regional strategy note issued on April 23.
It said that news flow has remained positive while the ringgit has already bottomed out, setting the stage for stronger foreign portfolio flows.
“Focus on beneficiaries of the key growth hubs in Johor, Penang and Sarawak with a trading bias, as the market adapts to the positive paradigm,” it told investors.
Reiterating its optimistic outlook for equity markets moving forward, it added that most of the negative news was already reflected in the price, and it believed corporate earnings had begun to improve.
“We note that the consensus base case is for the US economy to achieve a soft landing even as the monetary policy cycle crests. Any significant change in this core expectation would prompt a wholesale reassessment of our view of the equity market.
“Nonetheless, we remain war y of market volatility as political rhetoric escalates in the run-up to the US presidential election in November 2024,” it said.
Some key domestic considerations for Malaysia’s equity markets in 2024 identified in the report were Malaysia’s growth momentum which was expected to gather pace into 2024 and corporate Malaysia’s earnings which have historically displayed a higher degree of fragility.
It said that economic growth will be underpinned by the revival in the external sector, including manufacturing and exports.
“The rebound in the global technology cycle and improved regional economic landscape are expected to support the export-oriented segments. Domestic demand would be bolstered by robust consumer and investment spending,” it said.
On corporate earnings, it noted that with much of the negatives already priced in, the corporate earnings have turned the corner for the most part, which should enable it to be more resilient than in recent years.
The report also touched on political stability and reforms.
It said the stability of the ruling Unity Government was essential to provide a solid framework, within which effective policies can be implemented to facilitate longterm growth and competitiveness.
“Persistent efforts by the Opposition to destabilise the government will be negative for financial markets, and can impede economic growth if new investments are diverted elsewhere as a result,” it said.
On the reform agenda, the report said putting in place fiscal reforms to raise revenues and rationalise costs would have critical implications on the state of public finances.
“However, there is much scepticism on the quantum of polit ical will available to take the hard (unpopular) decisions. The window of opportunity will likely be a narrow one before the spectre of the 16th General Election re-emerges on the political horizon, as the reforms will also come at a price, with markets needing time to adapt.
“Initiatives to reduce subsidies will have implications for inflation and may crimp disposable incomes,” it added.
On the external front, it stated that some key domestic considerations included the evolving global macroeconomic situation, the economic recovery in China, US inflation data readings and the narrative surrounding US monetary policy.
Among the companies that made its ‘Top Buy’ cut were CIMB Group Holdings Bhd, Dialog Group Bhd and Unisem (M) Bhd. — TMR / pic TMR FILE
- This article first appeared in The Malaysian Reserve weekly print edition
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