Malaysia’s equity market expected to stay strong this year

KUCHING: Malaysia’s equity market is expected to stay strong in 2018 supported by a strong flow of deals, healthy gross domestic product (GDP) outlook, firmer commodity prices and a stronger ringgit against the US dollar.

The research arm of AmInvestment Bank Bhd (AmInvestment) pointed out that overall, the synchronised global expansion in 2017 is poised to continue unimpeded in 2018 supported by broader-based growth.

This could mean that the economic cycle has more room to run; hence, the trend of positive economic and earnings visibility which supported the equity market returns in 2017 should continue in 2018, provided earnings growth maintains momentum.

“Looking at Asia ex-Japan (AxJ), drivers will be economic reforms, improving corporate fundamentals, valuations and better-than-expected growth in the developed world. But the risks include a sharp rise in the US dollar, trade tensions and elections.

“India, China and selected Asean markets like Malaysia would benefit in 2018. The key concern is that a faster-than-expected Chinese slowdown would pose risks to the entire region,” it opined.

“Malaysia’s equity market is expected to stay strong in 2018 supported by a strong flow of deals, healthy GDP outlook, firmer commodity prices and a stronger ringgit against the US dollar.

“Initial public offerings (IPO) are poised to come from energy, infrastructure, financial services and consumer sectors. In 2018, one can expect several significant IPOs including Bank Islam, Edra Global Energy and potentially, foreign insurers in Malaysia.

“Besides in Malaysia, capital is expected to be raised through equity placements and right issues as the equity market continues to gain momentum.

“Furthermore, growth will come strongly from the mid-corporate segment,” it said, noting that adverse noises from geopolitical risks and the upcoming general election would only be temporary.

Aside from that, AmInvestment pointed out that improving global fundamentals would continue to support investment flows into Asian local bonds.

“For Malaysia, we expect the local bond yields to hold up to the pressure of US Fed rate hikes, more so with BNM’s hawkish tone.

“We feel the current Malaysian government securities (MGS) levels have already partially priced in a potential rate hike for the long-end of the yield curve.

“As for the short-end of the yield curve, we anticipate investors to eventually account for the probabilities in.

“A positive GDP growth outlook, improving business sentiment, supportive government policies and regulations and the firmer ringgit would continue to drive the demand for local bonds, moderating the potential rise in yields with some concern on the coming 14th General Election.

“We project the 10-year MGS yields to rise around 10 basis points in 2018,” it explained.

Meanwhile, it believed that the demand for MGS that are long-dated would remain resilient, supported by players like pension funds and insurers.

“Gross issuance of MGS and Government Investment Issue (GII) in the 11 months of 2017 is at RM102.4 billion while the corporate side gross issuance is RM111.2 billion and corporate bond issuance at RM190.1 billion at end-November, all surpassing expectations of RM100 billion to RM110 billion for 2017 MGS and GII bonds and RM105 billion to RM115 billion for corporate bonds,” it noted.

“With several infrastructure projects expected to kick off in 2018 as announced in Budget 2018 where the funding requirements are up to RM1.0 trillion, we expect a large proportion of this to be funded via the bond markets over the next few years,” it projected.

In the meantime, it believed that the Malaysian debt market would remain positive given the various funding requirements for infrastructure projects that are due to be rolled out.

“It will be financed through the debt capital market, sukuk issuances, or project financing and loan syndication. Corporate bond issuance should be around RM90 billion to RM100 billion in 2018,” it added.

As for the outlook of the ringgit, the research team noted that improving macro fundamentals and fiscal position, healthy consumer and business sentiments, improving fiscal position plus an extremely low default risk, a potential normalisation of the policy rate paves the way for the currency to further catch up in 2018.

“Besides, with an undervalued ringgit – our fundamental analysis shows a fair value of 3.95 while the real effective exchange rate presents a fair value of 3.76 – implies there is still plenty of room for this laggard currency to gain momentum,” it said.

All in, AmInvestment said, “Malaysia are expected to ride on the stronger global growth and commodity-sensitive and long-term valuations with some caution on the domestic noises.”

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