KUCHING: The so-called ‘January effect’ has been followed by a February pullback in the equity market but analysts view this as a healthy development.
According to the research arm of MIDF Amanah Investment Bank Bhd, continuing on the upward momentum from last year, the world’s equity market began the current year on a right footing with the MSCI World Index registering a 5.2 per cent return in January 2018.
“Domestically, waking up from its lethargy during most part of the second half of 2017, the FBM KLCI was also quite energetic as it chalked up a four per cent gain during January this year,” MIDF Research said.
“The so-called ‘January effect’ ended abruptly as we entered the month of February.”
Nonetheless, MIDF Research viewed the recent world’s equity price correction, which emanated from Wall Street, as a healthy development.
The research arm reckoned the moderated equity price trend trajectory would put the market on a sustainable forward footing that is more in consonant with the underlying fundamentals.
MIDF Research highlighted that at its recent peak in late January this year, the Dow Jones Industrial Average (DJIA) was up by nearly 35 per cent from the level in early January last year.
“In comparison, earnings are estimated to grow by less than half the pace at 14.4 per cent in 2017. Therefore, market valuation expanded to a multi-year high level.”
MIDF Research noted that pursuant to that, and despite the bullish consensus (by Bloomberg) figure projecting an even more robust earnings growth of 19.3 per cent for this year, investors decided to exit the market earlier this month which consequently helped to bring valuation down to less aggressive levels.
The research arm also noted that recent economic data coming out of the US drew market attention to a pickup in wage growth which, according to a top US Fed official, is a sign of a healthy economy.
“On this score, there are not enough indications at this juncture to force the central bank to raise rates much more this year than the three times it has been signaling.”
MIDF Research went on to highlight that since the onset of recent February selloff, the Asean equity markets (particularly emerging ones, namely Jakarta, Kuala Lumpur and Bangkok) have demonstrated their relative resilience vis-a-vis other regional and international markets.
“At the other end of the spectrum, the major North Asian markets (namely Hong Kong, Shanghai and Tokyo) saw the biggest percentage losses.
“Meanwhile, the main North American and European markets fared somewhere in between.”
The research arm pointed out that looking at the domestic equity performance from sectoral and capitalisation perspectives, it is not too surprising especially during period of elevated risk-off sentiment to see the defensive sectors (namely plantation and consumer) outperformed and the big caps (namely FBM Hijrah and KLCI) fared relatively better than their more diminutive peers.
“On the other hand, the small caps (namely FBM Small Cap and ACE) and cyclical sectors (namely technology, real estate, construction and industrial) fared relatively worse pursuant to the recent market selloff.”
Underpinned by continued corporate earnings growth this year, MIDF Research thus reaffirmed its FBM KLCI 2018 year-end target at 1,900 points.