Silver lining in FBM KLCI as decline could attract international interest

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It noted that since 2019 or over the last 15 months, the FBM KLCI has lost 26 per cent from 1,691 points to 1,257 points (of which six per cent loss occurred in 2019 and 20 per cent loss in 1Q20)

KUCHING: The FBM KLCI decline could attract international emerging market (EM) fund managers, who currently generally feel less excited about Malaysia due to its high valuations, analysts at AmInvestment Bank Bhd’s (AmInvestment) research firm opined.

“Assuming the FBM KLCI is to fall by about another 100 points from the current level to 1,150 points, this will bring the FBM KLCI in line with the MSCI EM Index’s 10-year (2010 to 2019) average price to earnings ratio (P/E) of 13.3-folds.

“This will put Malaysia back onto the radar of international EM fund managers, who currently generally feel less excited about Malaysia due to its high valuations,” it said in its market report.

It noted that since 2019 or over the last 15 months, the FBM KLCI has lost 26 per cent from 1,691 points to 1,257 points (of which six per cent loss occurred in 2019 and 20 per cent loss in 1Q20).

This compares with only a 14 per cent loss in the MSCI EM Index from 966 points to 827 points during the same period. This translates to an underperformance by the FBM KLCI against the MSCI EM Index of 12 percentage points.

“The unique ‘Malaysian premium’ over its EM peers came about more prominently after the global financial crisis in 2008.

“Prior to that, the FBM KLCI was indeed traded at a two-fold multiple discount to the MSCI EM Index in 2006, and at par with it in 2007. The build-up of the premium was a result of too much savings trapped locally, chasing after too few fundamentally strong large-cap Bursa Malaysia-listed stocks.

“The premium had been sustained despite major market de-rating catalysts such as the unfolding of the 1MDB scandal and the collapse of oil prices in 2014 to 2015, as well as the fall of the Barisan Nasional government during the 14th general election in 2018. We believe this was due to the availability of local liquidity during extreme market conditions in those times,” it commented.

Nonetheless, AmInvestment downgraded its end-2020 FBM KLCI target to 1,300 points based on 15-folds its 2020 forecast earnings (growth of 1.8 per cent), from 1,480 points based on 16.5-folds previously.

“We believe it is defensible to price the FBM KLCI at a slight premium to the MSCI EM Index in terms of P/E valuation given the significant presence of highly defensive (and hence high P/E) sectors, such as plantation and glove, in the FBM KLCI with a combined weighting of 14 per cent,” it added.

All in, AmInvestment said: “We remain cautious on the outlook of the FBM KLCI amidst the Covid-19 pandemic, the oil price crash and the delicate political situation locally.”