PETALING JAYA: The prospects of weaker economic growth in the second half of the year (2H23), which could impact earnings and valuations on the local equity market, and global headwinds have not deterred money managers from being positive on its prospects.
As the final quarter looms, investor sentiment has turned “risk off” on global markets after major central banks like the Federal Reserve (Fed) and the European Central Bank warn of higher rates for longer.
The threat of a government shutdown in the United States and sticky inflation, no thanks to higher energy prices, has triggered money flows from equity to debt to benefit from the risk free rate.
The local market however appears to have stood its own despite concerns about future earnings for the banking and consumer sectors, offset somewhat by positive expectations for the upcoming Budget 2024 due next month.
“Current valuation of the FBM KLCI at 13.5 times price earnings multiple remains at a discount to historical average (15 times).
“Having said that, with the potential earnings moderation in 2H23, valuation may eventually increase to reflect that. Catalyst may include economic friendly Budget 2024 which may lift sentiments.
“We believe the benchmark could settle at somewhere around the 1,530-point level (by end 2023), considering valuation to revert back to historical average and earnings moderation of around 4% to 5% from current consensus earnings expectation,” Nixon Wong, chief investment officer at Tradeview Capital told Starbiz.
Growing optimism due to political stability and announcement of the New Energy Transition Roadmap and the New Industrial Master Plan 2030 point to gains in the event of more market friendly measures and stronger growth.
From a thematic point, Wong advised inventors to look at opportunities in renewable energy, utilities and tourism and possibly avoid consumer discretionary as consumption may be weaker.
The local benchmark closed 6.8 points lower at 1,443 yesterday
The Institute of Chartered Accountants in England and Wales (ICAEW), Oxford Economics, however, warned the strength of domestic demand will be difficult to sustain but travel recovery is providing a boost.
While the inflows of tourist dollars will be helpful, it is unlikely to be enough to offset weakness in goods exports, it added. Malaysia’s gross domestic product growth is forecast to hit 3% in 2023 following the impressive 8.7% growth in 2022, ICAEW said in a release.
“This projection, while below the consensus of 4% and the central bank’s forecast of 4%-5%, is based on a realistic assessment of the economic landscape. Achieving the higher estimates would necessitate exceptionally strong growth in the third quarter (3Q) and 4Q,” the professional body stated.
While expecting the negative sentiment on global markets to cast a shadow over the local equity market’s performance, Thomas Yong, CEO of Fortress Capital Asset Management, expects the downside for the local benchmark to be limited as Malaysia’s foreign shareholding is at multi-year lows, meaning limited funds outflows.
“As such, the FBM KLCI should continue to experience lower volatility compared to regional markets. The performance of Bursa Malaysia in the final quarter of the year is more likely to be affected by government policies. Events such as Budget 2024, the rollout of development projects and clearer policies could be catalysts to some thematic plays,” he said.
The need for a market-friendly Budget 2024 is underlined by concerns it is less likely now for emerging market (EM) central banks like Bank Negara to embark on an interest rate cut cycle as the Fed does not pivot and inflationary pressures build from high energy prices.
“Now they need to maintain higher interest rates to defend their respective currencies’ depreciation against the US dollar in order to negate imported inflationary pressures. Having higher interest rates does not bode well for these EM equities as the opportunity cost increases for investing in equities,” noted Kelvin Wong, senior market analyst at Oanda Asia Pacific.
Yong expects China to sustain the roll out of stimulus measures gradually, and not in a big way, until the economy stabilises.
“Hence the spillover effects from the measures might not be felt by regional countries so soon, apart from certain segments such as tourism. Other sectors that might benefit from stronger demand from China include electrical and electronic, and commodity sectors,’ he said.
Oanda’s Wong noted there are some encouraging signs that the risk of a deflationary spiral in China has abated marginally as data on retail sales and industrial production for August have managed to beat expectations.
Given that China is Malaysia’s largest trading partner, and if more economic data starts to point to a stabilisation in economic risk in China after a slew of targeted stimulus measures from China’s policymakers, he expects the performance of the FBM KLCI in 4Q23 to be likely range bound as potential China’s positive factors offset the negative feedback loop from US dollar strength.
