KUCHING: JF Apex Securities Bhd (JF Apex) has revised downwards its year-end 2015 FBM KLCI target to 1,720 points from the previous projection of 1,930 points following a downward adjustment of 2014 to 2016 market earnings and target price earnings ratio.
The firm’s year-end KLCI target rendered minimal upside since current downside risks were more than upside risks, it said.
“Our top-down valuation is close to historical average price earnings ratio of 15 times as we expect equity valuation will gradually de-rate to be close to mean pursuant to diminishing market liquidity with the end of US’ QE amidst Federal Reserve maintaining ultra low interest rate for a ‘considerable time’, challenging domestic economic outlook and balance of payment status for 2015 as a result of dismal oil price and ringgit,” it noted in its report.
JF Apex also said there could be more ‘black swans’ ahead, judging from movements in key markets.
“We foresee a slew of downside risks which could derail our ‘still positive’ view on the equity market or even trigger the bear market,” it said.
It highlighted spillover effect of Russia’s crisis and geopolitical tensions re-emerge in Ukraine; exodus of foreign fund from emerging markets due to depreciation of Asian currencies; sharper-than-expected fall in China economic growth; economic recovery of Japan and EU is in doubt in relation to effectiveness of Abenomics and ECB’s monetary stimulus; and significant slowdown in domestic GDP growth as a result of decline in export and local consumption coupled with downgrade of sovereign rating pursuant to ‘twin deficit’.
Meanwhile, JF Apex believed the low interest rate cycle is over as Bank Negara Malaysia lifted the Overnight Policy Rate by 25 basis points (bps) in July’s Monetary Policy Committee (MPC) meeting, the first rate hike since May 2011.
“Moving forward, we expect there will be another moderate 25bps rate hike possibly in the second half of 2015 to contain the inflationary pressure stemming from implementation of GST effective April 2015 and outflow of fund amidst anticipated rate hike in US to defend the ringgit whilst accommodate the softening economic growth in 2015.
“Overall, we do not envisage any drastic rate hike which would hamper the overall economic growth and corporate earnings significantly in relation to higher financing and input costs for their FY15 results.”
The market would likely go back to fundamentals after years of liquidity-driven market rally, it opined.
“We believe the valuation of the local market could de-rate to the mean after years of liquidity-driven market rally since the Lehman crisis,” it explained.
“Investors are now accepting the fact that the market will ultimately be propelled by fundamentals premised on state of the economy and corporate earnings.
“We reckon that it is extremely difficult to predict the year-end KLCI target as market movement is now dictated by crude oil price.
“At this stage, it is still too early to say that oil price has reached its bottom, not to mention ‘V shape’ rebound to its previous level of US$80 to US$100 per barrel level, despite the recent mild rebound.
“We foresee oil price could continue to be volatile for another three to six months before finding its firm footing.”