Analysts are of opinion that there is little upside to FBM KLCI for the rest of the year, despite improving macro conditions and a handful of stocks performing commendably throughout 1H14.
KUCHING: Analysts are of opinion that there is little upside to FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) for the rest of the year, despite improving macro conditions and a handful of stocks performing commendably throughout the first half of 2014 (1H14).
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in a recent research, viewed: “Despite the existence of some pockets of value, the prevailing reality is that the overall valuation picture is not too attractive.
“At 112.66, the 2014 estimated FBM KLCI earnings denote a modest 7.4 per cent year-on-year (y-o-y) growth over 2013 figure.
“With such tepid earnings growth level and coupled with the already high valuation, we foresee rather limited fundamental impetus for the FBM KLCI to chart substantially higher ground.”
Furthermore, it said the market is expensive – looking from top-down as the current year price earnings ratio (PER) multiple of FBM KLCI now stands at 16.6.
“With a standard deviation (SD) of 0.92 and price earnings growth (PEG) of 1.93, the valuations of FBM KLCI are relatively stretched against its historical benchmark.
“Furthermore, on the PEG valuation yardstick in particular, the local benchmark surpassed most other regional markets including the broader MSCI Asia-Pacific ex-Japan (MSCI-APxJ) Index,” it explained.
Hence, the research team reiterated its FBM KLCI 2014 year-end target of 1,900 points, which is equivalent to 16.9-folds price earnings ration (PER) multiple of 2014 earnings.
On the other hand, AllianceDBS Research Sdn Bhd (AllianceDBS Research) opined, though the market is not expensive, Malaysia’s market valuation is not compelling.
“With earnings growth estimated to moderate to 7.3 per cent in 2015, there is little upside to FBM KLCI which trades at 15.3-folds 2015 price earnings,” it said.
It added, the FBM KLCI is currently trading at 16.5-fold 2014 price earnings, ahead of historical mean of 15.6-folds.
“With 2015 earnings growth estimated to moderate to just 7.3 per cent (based on free floated weighted average earnings), 2015 price earnings of 15.3-folds suggests that Malaysian blue chip counters are fairly valued with limited upside potential.
“Much of the earnings growth for 2015 is expected to come from the banking (59.9 per cent of total growth), telco (11.6 per cent) and utilities (9.7 per cent) sectors,” it explained.
On a relative basis, AllianceDBS Research viewed Malaysian equities price earnings valuation as “not excessive”.
Given that the FBM KLCI (a 0.8 per cent) has underperformed the MSCI Southeast Asia Index (a 7.7 per cent increase) in 1H14, the valuation spread of FBM KLCI over MSCI Southeast Asia of 1.61-folds is near historical mean of 1.7-folds, it said.
As such, AllianceDBS Research expects Malaysia’s stocks to hit 1,910 by end of 2014 based on 15.5-folds 2015 earnings, in line with historical mean.
However, it highlighted that domestic growth drivers are expected to be weak due to government measures to rein in burgeoning fiscal and household debts which have led to cost-push inflation and weak consumer sentiment.
It explained, “Corporate Malaysia is going through a rough patch now. Due to the unsustainable government’s fiscal position and high household debt per gross domestic product (GDP), measures such as subsidy rationalisation, utility tariff adjustments, tightening of lending guidelines and others, have been put in place.
“These have led to rising cost-push inflation, dampening consumer sentiment as well as consumer demand.”
It added, against such a backdrop, corporates with exposure to domestic markets are expected to experience earnings pressure from higher cost of doing business and/or slowdown in revenue growth.
“Corporates which rely on export markets may only have to grapple with higher cost and if they have strong bargaining power, may even be able to pass on the higher cost to customers,” it pointed out.
“As organic earnings growth becomes more challenging, alpha-seeking investors would have to look for growth stocks which are driven by investment and/or mergers and acquisitions (M&As),” AllianceDBS Research advised.
On a sector by sector analysis, the research firm viewed oil & gas and construction sectors favourably. However, it is more selective on stocks in the sector as valuations are no longer cheap but growth prospects remain promising given sizeable secured orderbooks and positive newsflows ahead.
As for Malaysia’s banking sector, AllianceDBS Research said banks are prime beneficiaries of the recent 25 basis points (bps) hike in overnight policy rate (OPR).
“Based on our sensitivity analysis, every 10bps hike in net interest margin (NIM) would raise earnings by circa five per cent.
“Banks with higher proportions of variable rate loans (most banks except for AMMB Holdings Bhd) and strong current and savings accounts base (Maybank, CIMB, Public Bank and HLB) should benefit in a rising interest rate environment.
“However, we remain cautious on the sustainability of NIM expansion given intense competition in the Malaysian banking sector. Based on past experience, our banking analyst Lim Sue Lin expects any NIM expansion from the OPR hike to be temporary as competition will likely erode margin gains eventually,” it opined.
On the plantations sector, AllianceDBS Research said the plantation sector’s performance has been mixed year to date as earlier gains in crude palm oil (CPO) prices due to expected El Nino fizzled out amid weaker exports and better than expected soybean planting in the US.
“As such, investors need to take a longer term view (instead of relying on shorter term fluctuations in CPO prices) and look for stocks with strong fresh fruit bunches growth,” it pointed out.
As for mid and small cap stocks, the research team said, “Admittedly, mid and small cap stocks have run ahead of fundamentals since the 13th general elections last year.
“Although investors’ risk appetite for mid and small cap stocks remains high, we need to be selective and focus on those with strong fundamentals and clear earnings visibility.”
Meanwhile, on a macro outlook, AllianceDBS Research viewed that macro conditions have improved as concerns over quantitative earnings (QE) tapering which led to massive outflow of funds from emerging market have slowly receded from its height in 2H13.
“Concerns over QE tapering and slowdown in global growth have largely receded. With market expectations of continued easing of monetary policies, liquidity conditions are friendly towards equity markets again, particularly emerging markets,” it said.
In addition, it said global PMI increased to 52.7 in June from 52.1 in May, pointing towards the much anticipated rebound in the global economy which was anchored by the economic rebound in US.
Despite that, it cautioned that the IMF recently downgraded US 2014 gross domestic product (GDP) growth forecast to 1.7 per cent from two per cent previously due to an exceptionally weak 1Q which was attributed to adverse weather conditions.
Additionally, European Central Bank’s (ECB) recent cut to its main refinancing rate from 25bps to 15bps in order to counter the risk of deflation in the eurozone also boosted equity markets.
“While the short term impact of an easing monetary policy is positive for equity markets, we warn that protracted exuberance among investors will lead to markets running ahead of fundamentals.
“Therefore, markets are likely to remain volatile and susceptible to any change in liquidity conditions going forward,” it pointed out.