A woman walks past electronic boards showing the share index at a bank in Kuala Lumpur.
KUALA LUMPUR: Stock selection is crucial in 2016 given the FBM KLCI’s current fairly priced-in valuation, and ongoing cautious market sentiments.
JF Apex Research said investors should adopt a combination of defensive and active investment strategy by investing in value stocks, which are trading at lower price relative to their book value and earnings.
The focus should also be on growth stocks yielding better earnings prospects; high-yielding stocks with resilient business models; and thematic plays which are expected to benefit from the upcoming positive newsflow.
The FBM KLCI is currently trading at 15x 2016 consensus PE, which is close to its historical mean PE of 15.2x, the second highest PE after the Philippines Composite Index and on par with Jakarta Composite Index.
This indicates that the FBM KLCI is trading at 17% PER premium to other major Asian indices. Furthermore, the yield of the local market looks unappealing for long term investors, rendering a mere 3.5% for 2016, which is lower than Singaporean, Taiwanese, HK and Thai bourses.
“At this junction, we deem the current valuation as fully valued in the absence of any positive catalyst whilse immediate market outlook remains bleak, which is mired by prevailing weakness in crude oil prices and ringgit,” it said.
The research house targets for year-end 2016 FBM KLCI to reach 1,770 points, with market EPS growth of 5% in 2016 and 8% in 2017.
“We foresee a rising equity risk premium in tandem with higher risk free rate as a result of increasing bond yield which would eventually lead to lower asset value,” it said in a note on Wednesday.
The research house forecasts 2016 market earnings growth to end the period of 3-year earnings downcycle or disappointments, i.e. 2013: -5.1%; 2014: 1.9%; 2015 market estimate: -6.8%. It anticipates 2016 market EPS to grow at 5% against consensus’ expectations of 9%, on the back of low-base earnings in 2015.
For the first half of 2016, it thinks the market would trade sideways with negative bias in the absence of any positive catalyst.
Thus, the performance of the large cap counters, also the main constituent stocks of the FBM KLCI would remain lacklustre.
It does however expect a better second half of 2016, based on stabilisation of oil prices, ringgit and recovery in corporate earnings towards 2017 as market traditionally moves 3-6 months ahead of the fundamentals.
“Also, we believe the impacts of GST on domestic consumption, 1MDB woes, foreign selling pressure would subside coupled with crystallisation of TPPA moving into the second half, which could prompt investors’ interest back into the local bourse,” it said.
JF Apex believes that crude oil price would continue to find its equilibrium in 2016 amid current massive supply glut in relation to rising American shale oil production and refusal of OPEC to cut production.
Volatility in oil prices could continue to negatively impact the performance of local bourse. Its in-house forecast for Brent for 2016 is at US$40/barrel against government’s projection of
US$48/barrel.
On the ringgit, although it is perceived to be undervalued based on the country’s underlying economic fundamentals, investors’ confidence in the country’s prospects in respect of political
stability, sustainability of economic growth and financial health are equally important in determining the nation’s currency strength.
The research house expects the ringgit to remain sluggish against the US dollar in 2016, albeit with limited downside risk and possibly hovering in a range of 4.10-4.50 by year-end, amid anticipated further depreciation of RMB to stay competitive in its exports.
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