KUCHING: Analysts at RHB Research Institute Sdn Bhd (RHB Research) retain its positive view on Malaysian equities on the back of stabilising oil and recovery in corporate earnings as key re-rating catalysts for the local market.
RHB Research said the sharp correction in equities since the last quarter of 2014 was triggered by the collapse in oil prices, which sparked fiscal worries, heightening downside risks for GDP growth from reduced investments in the oil & gas (O&G) sector and causing the ringgit to spiral lower.
“We do not rule out crude oil price volatility throughout the rest of this year and expect equilibrium to be reached in 2H15, averaging the year at US$72.50 per barrel, helped by improving global demand conditions and reduced supply,” it said in its note yesterday.
As Malaysia remains the only net O&G exporter in Asean, RHB Research affirmed that it will be the sole beneficiary of the recovery in oil that will extinguish lingering fiscal concerns.
“Our base case assumptions are that the global economic recovery will not be derailed and there is no risk of significant tightening of monetary policies in developed economies to trigger a rate shock.
“Lower oil will also hasten the global economic recovery, driven mainly by the US and UK economies. US consumers, in particular, will also benefit from a stronger USD, which should increase their purchasing power.”
The timing of the normalisation of US interest rates remains data dependent, although the latest US Federal Reserve comments suggest that the first rate increase is unlikely until September or December 2015, it added.
Thereafter, it proceeded at a more gradual pace, after recognising that a June hike could lead to an even stronger US dollar, which could have negative implications for growth and inflation.
“In the near term, portfolio flows may move back to emerging markets on the back of increased appetite for riskier asset classes.
The under-owned and unloved Malaysian equities market could enjoy some spillover.
“This could help to mitigate the impact of a possible sovereign rating downgrade by Fitch, which we believe is not yet fully priced in.
Better earnings growth this year.”
Also, RHB Research believed Corporate Malaysia will be able to show improved bottomline growth this year after lacklustre earnings over the past three years, driven by corporates leveraging on their investments in manufacturing capacity, manpower and technology in the last two years.
It forecasts 2015 and 2016 FBM KLCI EPS growth of 6.4 per cent and 9.5 per cent from seven per cent and 7.8 per cent respectively at the end of the preceding quarter.
FBM KLCI earnings growth this year will be derived mainly from the banking, utilities and healthcare sectors.
“Based on an unchanged 16.5 times one-year forward price earnings ratio, our end-2015 target for the index is 1,910 points from 1,960 points.”
Equities remain the research firm’s preferred asset class with a preference for stocks offering good growth prospects and believe there is a less compelling case for yield stocks.
“We have 10 sectors (of 22) in which we have overweight calls, up from eight in the preceding quarter, with O&G and healthcare the two most recent upgrades,” it concluded, adding that its key overweight sectors include utilities, construction, ports & shipping, O&G and healthcare.