The tide of funds flow has not been favourable for the Malaysian equity market for most of the time this year.
Foreign investors have been disposing off shares on Bursa Malaysia which led to cumulative net outflow of RM17.4 billion for the week ended Nov 6.
This amount represents more than 2.5 times the RM6.9 billion which shifted out of the Malaysian stock market for the whole of last year.
Despite the larger funds outflow as compared to the previous year, analysts opined that there could be short term cheer for Bursa Malaysia.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in a report last week said, “The local market has certainly kicked off November with the proverbial bang.
“After the first week of trading, the market is bucking the trend and the (FBM) KLCI is having its best November month since the Global Financial Crisis with a gain of 1.6 per cent.
“The underlying resilience of the market has been remarkable. We reckon market sentiment will continue to be mildly positive over the short term ahead of the third quarter 2015’s (3Q15) gross domestic product (GDP) numbers.”
Moving forward, MIDF Research said positive sentiment towards corporate earnings could be an enduring catalyst for the market. Foreign investors turned net buyers again for the week ended Nov 6 after briefly selling the week before.
It observed that the buying momentum has gathered pace as foreign funds have been net buyers in four out of the last five weeks although the buying was moderate.
In particular, the retail market continued to remain vibrant as trading was active among retail investors with participation rate surging to RM902 million, the highest in 28 weeks.
Following the announcement of several corporate results for 3Q15 recently by several government-linked companies (GLCs), MIDF Research believed the current ongoing 3Q15 earnings reporting season has been promising.
The research firm is upbeat that the promising results could signal an end to “earnings recession” for companies on Bursa and expects them to register better than expected financial performance as compared to the last quarter.
Based on several 3Q15 results of GLCs under MIDF Research coverage, the research firm observed there were three outperformers against one underperformer out of the 11 results released until Nov 6.
3Q15 earnings preview
In a sneak preview of the ongoing 3Q15 earnings reporting season, MIDF Research in a report dated Nov 9 said the ongoing reporting season has so far been pointing towards the beginning of the end to the prolonged drought in earnings growth.
For the quarter ended September 2015, the research firm forecasted that the aggregate reported earnings growth of FBM KLCI current constituents is estimated at RM13.66 billion.
The amount, MIDF Research projected represented a decent growth of 0.7 per cent quarter-on-quarter (q-o-q) as compared to the combined RM13.56 billion earnings reported in the preceding quarter.
Additionally, MIDF Research said, “We are expecting largely positive earnings peformance among the FBM KLCI’s big five sectors.
“Those sectors are banking, oil and gas (O&G), utility, telecommunication and plantation.
“Out of the big five sectors, the banking and plantation sectors are expected to register slight negative year-on-year (y-o-y) earnings growth.
“On the other hand, we expect positive q-o-q growth for the big five sectors except plantation,” the research firm opined.
MIDF Research highlighted stabilisation in corporate earnings or even improvement in earnings sentiment could be an enduring catalyst for the equity market going forward.
Conservatively, the research firm estimated a valuation of 1,650 points for the FBM KLCI by year-end which valued the market based on 14.7 times 2016 price-earning ratio (PER).
It noted consensus expects corporate earnings to recover next year which should bode well for price performance going forward.
Thus, MIDF Research has set a target of 1,800 points for the FBM KLCI by end of 2016, valuing the market based on 2016 PER of 16 times.
Meanwhile, Kenanga Investment Bank Bhd expects the FBM KLCI to move to 1,785 points or 1,795 points levels next year.
The investment bank believed the local stock market sentiment remains favourable but the global economy and the US interest rate direction would still have an influence on the movement of Bursa Malaysia.
Analysts, market observers view on 4Q15
At this juncture, analysts and market observers believed that the local equity market might move in a range of between 1,650 points and 1,750 points towards year-end.
They believed the downside movement of the FBM KLCI will be limited as foreign funds selling has eased as well as the potential capital injection of RM20 billion by ValueCap Sdn Bhd (ValueCap) in 4Q which could support the market.
JF Apex Securities Bhd’s research head Lee Chung Cheng said, “Market continues to exhibit volatile trend.
“Although 4Q (November or December) is seasonally a good quarter for the year mainly driven by window dressing activities, we think that gains might be capped.
“These could be due to weak external sentiment in relation to the lingering concerns on US (interest) rate hike, China economic growth, depreciation of the ringgit against the US dollar, prolonged weakness in commodity prices especially crude oil prices on the nation’s fiscal status, on top of the worries on local specific factors such as the 1Malaysia Development Bhd (1MDB) scandal and political stability.
“Having said that, we reckon that the downside risk could also be mitigated by the recently announced RM20 billion fund injection by ValueCap into the market and positive newsflow of monetary easing from China and Europe, as evidenced by dwindling foreign selling pressure on the local bourse,” he told BizHive Weekly in an e-mail interview.
When asked on the possibility of foreign funds returning to Bursa Malaysia by year-end during the “window dressing” period, Lee opined that chances are mild.
At the same time, CIMB Research head Terence Wong said it is hard to predict whether foreign funds will return to the local stock market by year-end.
Nevertheless, he noted that foreign ownership of equities was relatively low and believed that any selling pressure should be muted.
Wong opined that the 4Q will witness a recovery of the local bourse and projected that the FBM KLCI to reach 1,700 points level by year-end.
Apart from that, Affin Hwang Asset Management Bhd (Affin Hwang AM) said the global market volatility will remain bumpy in the near term.
However, the asset management company believed that there are opportunities to make money regardless of market condition.
Affin Hwang AM’s managing director Teng Chee Wai said, “We have positioned our portfolios to take part in thematic plays that are able to address the current market environment,” he stressed.
On another note, the research arm of BIMB Securities Sdn Bhd (BIMB Securities Research) in a report said the local bourse might see an uplift in the 4Q.
The research firm is also confident that foreign funds will return and make their presence felt in the Southeast Asia (Asean) region.
This is due to the valuations of the Asean stock market which have remained attractive as they were traded below their five-year average price-earnings (PE) as compared to the US equity market.
BIMB Securities Research said although the valuation of Bursa Malaysia was not cheap on 2015 numbers, it believed that the local stock market should benefit from the spillover effect from the regional inflows of funds coupled with the fact that the ringgit has remained undervalued.
Moreover, it pointed out that an economic stimulus delivered by Prime Minister Datuk Seri Najib Tun Razak a few weeks ago might have worked some wonders on the local bourse.
In particular, BIMB Securities Research noted the revival of ValueCap and its RM20 billion funds which could provide positive sentiment to the local bourse.
With the catalyst, the research firm said market observers are expecting the purchase of securities on Bursa Malaysia to dominate in the foreseeable future.
Besides that, BIMB Securities Research also anticpates the buying momentum to carry on until the first quarter of 2016 (1Q16).
BIMB Securities Research head Kenny Yee said, “Apart from the existing domestic hurdles, any move by the US Federal Reserve to tweak their interest rates might trigger a negative knee-jerk reaction on equities.
“However, we envisage the market will revert to their equilibrium during the course of the year.
“Based on our estimates, we anticipate the FBM KLCI to break the 1,800 points mark or reach 1,830 points in 2016,” he said.
With a higher target level for the index, there could be a few sectors which could benefit from the bullish mode.
Ringgit’s movement and economy outlook
For the ringgit’s movement, Bank Negara Malaysia (BNM) revealed last Friday that between October 1 and November 11, the ringgit appreciated against all major currencies.
The central bank observed that the ringgit appreciated against the US dollar by 1.8 per cent during the period, the euro (6.5 per cent), the Japanese yen (4.4 per cent), the pound sterling (1.8 per cent), and the Australian dollar (0.9 per cent).
The ringgit also appreciated against most regional currencies, except for the Korean won which contracted by 1.2 per cent and the Indonesian rupiah which depreciated by 5.7 per cent.
BNM noted that the ringgit and other regional currencies continued to face volatility during 3Q15 due to uncertainty in global growth and monetary conditions.
During 3Q15, the central bank disclosed that the ringgit depreciated by 14.8 per cent against the US dollar.
For the same period, it added the ringgit also depreciated against the Australian dollar by 6.8 per cent, the pound sterling (-11.7 per cent), the euro (-15.4 per cent), and the Japanese yen (-16.6 per cent).
Against all regional currencies, BNM said the ringgit depreciated by between 6.3 per cent and 12.8 per cent.
On a different note, Affin Hwang AM forecasted that the ringgit will stablise around RM4.20 to RM4.30 per US dollar by year end. The ringgit closed at RM4.37 per US dollar last Friday.
As for the country’s economic growth, BNM believed that domestic demand will remain the key driver of growth.
Nonetheless, it expects global growth to remain moderate going forward.
“While the major advanced economies continue to improve, the pace of recovery will be modest.
“In Asia, domestic demand is expected to continue to support growth.
“Downside risks to global growth remain high arising from the moderating growth momentum in a number of major economies, uncertainty surrounding energy and commodity prices and possible disorderly market conditions arising from policy shifts in major economies.
“While downside risks to growth remain, the Malaysian economy is expected to expand within the region of 4.5 to 5.5 per cent this year and 4 to 5 per cent in 2016.
“As a result of structural adjustments that have been steadily undertaken over the years, the economy is now supported by diversified sources of growth,” the central bank pointed out.
It stressed that domestic demand will continue to be the main driver of growth, supported by private sector activity with the external sector performance expected to be modest.
In addition, BNM noted the flexible exchange rate, deep and more mature financial markets and solid financial institutions will support the moderate growth trend and ensure that shocks such as volatile capital flows are well intermediated, therefore minimising spillovers to the real economy.
For 3Q15, BNM announced last Friday that the country’s economy’s growth moderated to 4.7 per cent quarter-on-quarter (q-o-q) from 4.9 per cent in 2Q15 supported by private sector demand.
The central bank explained that the private sector continued to be the key driver of growth during 3Q15.
It outlined that private investment grew by 5.5 per cent as compared to 3.9 per cent in 2Q15, driven by capital spending in the manufacturing and services sectors.
However, the central bank observed that private consumption expanded at a more moderate rate of 4.1 per cent against 6.4 per cent in 2Q15 as households continued to adjust to the implementation of the Goods and Services Tax (GST).
Surprisingly, BNM said public investment turned around to record a positive growth due to the improvement in spending on fixed assets by both the federal government and public enterprises.
Meanwhile, the central bank said public consumption growth moderated to 3.5 per cent from 6.8 per cent in 2Q15 following slower growth in both emoluments and supplies and services expenditure.
“On the supply side, all economic sectors continued to expand during the quarter.
“Growth was led by the construction and manufacturing sectors.
“Construction sector growth improved due mainly to a faster expansion in the civil engineering and specialised construction activities sub-sectors,” BNM said.
Similarly, the central bank added the manufacturing sector registered higher growth, supported in particular by an improvement in the export-oriented industries.
The services sector, BNM pointed out registered lower growth due to a moderation in household spending and slower capital market activity.
Moreover, the central bank highlighted the mining and agriculture sectors expanded at a slower pace due to moderation in crude oil and palm oil production respectively.
JF Apex Research opined that the 3Q15 growth of 4.7 per cent, the slowest pace in more than two years was in line with the market and the research house’s expectations.
The research firm concurred with the central bank’s outlook and envisaged that the country’s economic growth will be moderate in the near term.
JF Apex Research pointed out that the impact from weakening ringgit, domestic political uncertainties as well as lower oil prices will dent the oil and gas investment and government spending, and hence likely to constrain the growth of domestic demand going forward.
“We foresee that consumer sentiment will continue to be weak in 4Q15 amid rising cost of living.
“Hence, we expect economic growth to be moderate in 4Q15, (potentially to) grow at 4.5 per cent y-o-y as private consumption remains as a major driver for our gross domestic product (GDP) growth.
“Following the better-than-expected 3Q15 GDP growth, we revised our full-year GDP forecast from 4.8 per cent growth to 4.9 per cent.
“Our GDP growth will continue to be supported by the production side especially manufacturing sector, mainly driven by electrical and electronics (E&E) products on top of the further recovery of our external demand in the last quarter of the year,” the research firm believed.
Sectorial analysis and recommendations
As in Budget 2016, Najib has announced several public infrastructure projects which will kick-off next year.
These include the construction of the Pan Borneo Highway, the Mass Rapid Transit Line 2 (MRT2) and Light Rail Transit Line 3 (LRT3).
Thus, the construction sector is one of the sectors which is set to benefit from more contracts that could be awarded next year.
BIMB Securities Research is upbeat on the sector due to the progress of work going on and the value of projects awarded.
The research firm observed that for the nine months of 2015 (9M15), total value of projects awarded reached RM13 billion or 26.4 per cent higher from RM10.4 billion in the corresponding period last year.
It believed that the construction sector will remain vibrant as there could be more contracts to be awarded in the coming months.
Hence, BIMB Securities Research affirmed its positive rating on the construction sector.
Concurring with BIMB Securities Research, Affin Hwang Investment Bank Bhd, AmResearch Sdn Bhd, CIMB Research and JF Apex Research were also bullish on the construction sector due to higher development expenditure by the government in Budget 2016 which will witness more projects to be developed.
Another sector which should benefit is the rubber glove sector.
Rubber glove players are going to gain from the special reinvestment allowance (RA) incentive as they could claim the incentive as a result of their capacity expansion.
AmResearch noted that glove manufacturers are investing between RM150 million to RM400 million per year for the next three years for capacity expansion due to healthy demand growth.
With the RA incentive, the research firm foresees earnings upside for rubber glove players as their effective tax rate would decline going forward.
AmResearch maintained its ‘overweight’ rating on the rubber gloves sector given the manufacturers’ prime position as exporters operating in a defensive sector and strong earnings growth momentum on the back of expanding operating profit margins.
On top of that, the utility sector is also one of the industries which could enjoy better earnings due to lower cost arising from lower coal and gas prices.
MIDF Research said the sequential earnings growth of the utility sector was boosted by the recognition of the Imbalance Cost Pass Through (ICPT) for the 17-month period.
Specifically, it observed that Tenaga Nasional Bhd (TNB)’s earnings growth was contributed by the easing trend in fuel costs due to the decline in coal and gas prices as well as more favourable power generation mix.
The research firm in an earlier note in October said coal price has continued to be depressed due to an oversupply of coal in the global market in which the demand was much slower to pick up than production.
At the same time, MIDF Research believed that the cost of the liquefied natural gas (LNG) for the power sector would be cheaper going forward with the weaknesses in the price of LNG brought upon by the decline in global crude oil prices six months ago.
The research firm estimated that the decline in global crude oil prices is going to be reflected in the LNG’s selling price to the power sector.
“We continue to believe that both LNG and coal prices will remain flattish in 2015.
“As such, a lower power generation cost for the industry is expected to remain in 4Q15 on the back of the current subdued fuel cost environment,” the research firm said.
Bursa Malaysia Bhd’s chief executive officer (CEO) Datuk Tajuddin Atan said small and medium capitalisation stocks with market capitalisation of under RM1 billion are gradually attracting interest from investors.
He explained that investors especially retail investors were interested to invest in small and medium capitalisation companies due to their good return on asset and revenue as well as compound annual growth rate (CAGR).
Wong of CIMB Research who also has a preference for small capitalisation stocks said the research firm top picks for small caps were MyEG Services Bhd (MyEG), Prestariang Bhd, GHL Systems Bhd (GHL) and Only World Group Holdings Bhd (OWG).
Meanwhile, Lee of JF Apex Research opined that investors could look at local catalyst-driven sectors such as electronic service providers which could benefit from the implementation of cashless payment and education.
Companies which involved in those sectors include MyEG, GHL, Scicom (MSC) Bhd and Sasbadi Holdings Bhd.
“For long-term investors who aim for defensive sectors and looking for decent dividend yield to shelter the short-term volatility, they are advised to fish for retail and industrial real estate investment trusts (REITs).
“For instance, Sunway REIT, Pavillion REIT, Axis REIT and KLCC REIT
“Otherwise, they can look out for number forecast operators such as Berjaya Sports Toto Bhd, Magnum Bhd, healthcare such as KPJ Healthcare Bhd, IHH Healthcare Bhd, concessionaires which include highway or port for example, Lingkaran Trans Kota Holdings Bhd, Westports Holdings Bhd and utilities, TNB, YTL Corporation Bhd, YTL Power International Bhd, Gas Malaysia Bhd and Malakoff Corporation Bhd.”