To be at par with regional valuation, the FBM KLCI has to dip to 1,550 but it see minimal possibility of that happening in the the second quarter of 2016 (2Q16) as the current recovery in oil price and possible dovish comments from the US Federal Reserve could help minimise any potential fund outflows.
KUCHING: The 1MDB debt fiasco could cause erosion in Malaysia’s index but analysts believe that the current recovery in oil price and possible dovish comments by US Fed could help minimise potential fund outflows.
TA Securities Holdings Bhd’s research arm (TA Securities) said this in a report, and explained that to be at par with regional valuation, the FBM KLCI has to dip to 1,550 but it see minimal possibility of that happening in the the second quarter of 2016 (2Q16) as the current recovery in oil price and possible dovish comments from the US Federal Reserve could help minimise any potential fund outflows.
In terms of the benchmark index, Malaysia currently enjoys a 9.2 per cent premium compared to regional markets.
Malaysia’s current 2017 price earnings ratio is 15.1-times compared with the region’s 13.8-folds, TA Securities noted.
“Besides, as the Malaysian government’s oil price assumption in Budget 2016 was between US$30 and US$35 per barrel, the current price of around US$45 per barrel has the potential to add more than RM3 billion to government coffers,” it added.
Of note, on Wednesday, it has been reported that 1MDB had defaulted on a US$50.3 million interest payment for the US$1.75 billion bonds issued by its unit 1MDB Energy (Langat) Ltd, following a dispute with Abu Dhabi’s International Petroleum Investment Company (IPIC), over debt obligations to IPIC under an agreement reached in May 2015.
This had triggered cross defaults on some of its other bonds. On Wednesday, Malaysia’s FBM KLCI took a 22-point dip to 1,692.5 and as at 2.30pm yesterday, the index resumed its decline to 1,684.31.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the ringgit was also weaker on Wednesday arguably in reaction to the default news.
“Nonetheless, it is noteworthy that the offshore-onshore spread on US dollar to ringgit Forward Rates remain so in negative territory which reflects continued underlying market bullishness on the ringgit,” the research team pointed out.
As for the performance of the FBM KLCI, MIDF Research believe that the default would not materially alter the underlying liquidity and earnings dynamics of the equity market.
“Thus, knee-jerk equity market reaction to the default of Langat Notes notwithstanding, we reiterate our FBM KLCI 2016 year-end target of 1,800 points,” it said.
TA Securities had also maintained its year-end target of 1,775 based on 2017 price earnings ratio of 15.8-folds.
“We maintain our defensive stance on the market due to stretched valuation and limited upside from commodity price recovery,” it commented.