KUCHING: Malaysia’s market is set to perform better in 2020 despite expectations of mediocre results by the end of this year.
In a report, the research team at AmInvestment Bank Bhd (AmInvestment) believed the market would do better in 2020 amidst low expectations.
“We are projecting an end-2020 FBM KLCI target of 1,670pts based on 17.5-folds our revised 2020 earnings projection (which is still at a 0.5-folds multiple discount to its 5-year historical average of about 18-folds),” it said.
It explained that catalysts for a market rerating in 2020 could potentially come from increased appetite for risk assets, particularly, emerging market (EM) equities including Malaysian equities (EM
equities, a change in Malaysia’s perceived country risk premium, and a play on the ringgit,
It pointed out that EM equities have already attracted net inflows over the last four weeks, although this has yet to spill over to Malaysian equities.
As for the ringgit, it could be driven by events such as FTSE Russell is to retain Malaysia in the World Government Bond Index during its next half-yearly review in March 2020, a steep rise in crude oil prices (Malaysia is a net exporter of oil & gas), and an end to the easing cycle with only another 25bps cut in the overnight policy rate by Bank Negara in 2020.
As for its expectations of its end-2019 FBM KLCI, it has downgraded its forecast to to 1,570pts based on 16.5-folds its revised 2020F earnings projection, from 1,680pts based on 17-folds its 2020F earnings projection previously.
“The just-concluded 3Q2019 quarterly results showed marginal improvement over the previous quarter. While none of the FBM KLCI component stocks under our coverage actually beat our projections (as in the previous quarter), those that missed our forecasts were actually reduced to seven (from eight previously). Having reflected earnings changes, we revise down our projected FBM KLCI growth rate in 2019F to 5.5 per cent (from 4.9 per cent prior to the results) and in 2020F to 7.5 per cent (from 7.9 per cent previously).
“Having said that, we acknowledge that, historically, December has been a good month for the local stock market with the FBM KLCI rising during nine occasions over the last 10 years with gains ranging from 0.6 per cent to 4.8 per cent.
“However, this time around, we believe year-end window dressing activities, if any at all, are likely to be weighed down by the subdued sentiment towards the local stock market, which has been made worse by the recent de-rating of the national utility company Tenaga (that carries close of a 10 per cent weighting in FBM KLCI) on the heels of an additional RM4 billion tax assessments received from the Inland Revenue Board,” AmInvestment said.
At 16.5-folds, it noted that the the FBM KLCI’s valuation is at a 1.5-folds multiple discount to its five-year historical average of about 18-folds.