KUCHING: Malaysian equities’ valuation is far from being stretched amid a global rally as analysts believe that the Malaysian economy and equity market are supported by strong external and domestic factors.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) noted that the strong momentum in December, with the KLCI gaining 4.6 per cent, has continued into January as the benchmark index gained 1.6 per cent in the first half of January.
Although trading at 2018 price earnings of 16.1-folds, which is slightly ahead of the historical mean,Malaysian equities’ valuation is far from being stretched amid a global rally, it opined.
“Strong external demand, recovery in domestic consumption and rebound in crude oil prices are the key tailwinds for the Malaysian economy and equity market,” it said.
It noted that on the external front, the November 2017 trade data released earlier this month showed sustained growth momentum in gross exports which grew 14.4 per cent year-on-year (y-o-y).
“Again, electronics and electric (E&E) goods, which made up 38 per cent of exports, were the key driver for the strong exports.
“Amid synchronised global growth, we expect exports of E&E goods to be sustained in 2018, albeit at a slower pace given the strong growth in 2017,” the research team said.
In Malaysia’s context, it noted that it prefered the electronic manufacturing services (EMS) sector to the technology sector as a proxy for E&E export growth due to the former’s lower valuation and higher earnings growth potential.
As for the movement of crude oil prices, AllianceDBS Research said Brent crude oil prices continue to gain further ground in 2018.
It pointed out that this is a major boost not only to government’s finances but can also act as re-rating catalyst for the ringgit and oil and gas stocks.
“With improved sentiment within the global oil & gas value chain, we believe capital expenditure (capex) spending is poised to recover slowly but surely going into 2018,” it opined.
On the domestic front, AllianceDBS Research noted that private consumption has shown a steady improvement since bottoming in 3Q15 as the drag from GST implementation eases, with the sustained economic growth spilling over to the broader economy.
“With general elections due this year, the government will likely keep a lid on rising of cost of living. Besides measures already announced in Budget 2018 to boost domestic consumption and sentiment, the government’s recent decision to maintain the electricity tariff for 1H18 is also positive for consumers,” the research team added.
Overall, AllianceDBS Research maintained its end-2018 FBM KLCI target at 1,870 (implying 16.4-folds PE), which are derived using a bottom-up valuation approach.
“The FBMKLCI is currently trading at a 2018 PE of 16.1-folds which is slightly ahead of the historical mean. Having said that, the FBM KLCI’s valuation is far from being stretched especially during a bull market,” it said.