PETALING JAYA: Analysts are generally confident about Malaysian equities as the second half of 2024 (2H24) rolls in despite several macroeconomic factors that may affect the prospects of the FBM KLCI.
The local index has performed reasonably well in 1H24, having been supported by a global rebound as the US economic data had surprised on the upside, coupled with investors capitalising on an artificial intelligence (AI)-driven theme, as well as stability in corporate fundamentals, according to analysts.
Global equities had experienced a strong year-to-date (y-t-d) performance, supported by positive economic data and delayed monetary policy easing, which has bolstered market sentiment, observed Phillip Research Sdn Bhd.
“Our outlook for the domestic equity market remains positive, with catalysts being the strengthening ringgit, robust gross domestic product growth, stronger corporate earnings, and a stable political environment attracting foreign inflows,” it said in a note yesterday.
The research house said more funds would be channelled into small-medium (small-mid) capital stocks following the “easy money” gain by investors from the large-cap counters while taking advantage of the strong structural growth themes common to smaller companies.
It reported that the FBM Small Cap index (FBMSC) outperformed the FBM KLCI, rising 18% y-t-d, attributing the strong showing to a resilient domestic economy that boosted investor confidence and improved earnings among the small-mid caps, as well as reduced political uncertainties.
“Moreover, government-linked investment companies’ mandate to reduce foreign investments has likely resulted in increased allocation towards domestic investment, providing additional liquidity and support for the local market,” said Phillip Research.
In addition, it said government policy continuity is also expected to provide further support for equities.
Concurring, chief investment officer of Tradeview Capital Nixon Wong said the positive momentum driving local equities will continue, propelled by potential foreign fund inflows, solid policy rollout and healthy economic growth.
He told StarBiz that valuations of local stocks are still considered reasonable, with the FBM KLCI trading at its five-year price-earnings ratio average of around 15 times.
Having said that, he cautioned that with only one rate cut by the US Federal Reserve (Fed) being projected by the end of 2024, if the US economy shows limited signs of deterioration, the cut may likely be pushed back to next year.
Meanwhile, Apex Securities noted that the FBM KLCI’s y-t-d surge from the 1,453 mark at the start of the year has been buoyed by the return of foreign funds and the performance of value-chain suppliers such as Tenaga Nasional Bhd
and YTL Corp Bhd.
However, it is of the view that they would taper off as the premier bourse hovers around the benchmark 1,600-point level, saying: “We reckon that investors may adopt quick profit-taking activities, whilst waiting for fresh catalysts, although any potential pullback will be quickly met by bargain-hunting activities in the interim.” At the same time, volatility could be present, to an extent, ahead of the US presidential election, and the resumption of recovery prospects would largely be on the cards once the next US president is elected, as market sentiment calms down by year-end, bringing along the seasonal window dressing activities.
Resonating with Phillip Research’s view, Apex Securities expects the FBMSC to remain in the spotlight, projecting increasing volatility as overbought conditions may prompt investors to lock in gains in the interim. Notably, should trading liquidity remain upbeat, it is anticipating the FBMSC to challenge its 1997 historic high.
“With ample trading liquidity as well as oversubscription rates of recent initial public offerings, we believe the Malaysian equities market remains a preferred destination of investment alternatives,” said the securities firm.
Shifting the focus to attracting foreign investments, Phillip Research commented that Malaysia, with a net y-t-d outflow of RM706mil, had lagged behind other nations in Asia such as South Korea and Taiwan, which had attracted a combined US$21bil in 1H24 due to their heavy technological weightage.
Tradeview’s Wong added that foreign investors were net buyers in the first four months of 2024, before profit-taking occurred in the past two months.
Explaining Malaysia’s hang back compared with the two East Asian countries, he opined that South Korea and Taiwan are driven by AI advancements and Nvidia Corp’s exceptional growth.
“This sector provides visible earnings growth, offering certainty to foreign investors.
“In contrast, Malaysia relies more on news flow to stimulate investor sentiment, with relatively lower certainty on earnings delivery,” he pointed out.
A factor that could attract external investments, however, is the gradual strengthening of the ringgit, or at least the stemming of its weakness against the US dollar. Phillip Research and Apex Securities remained hopeful that the Fed rate cut –expected to take place in 4Q24 – would draw in foreign funds, with the former predicting that the local note may improve to RM4.40 to RM4.50 against the greenback by the end of the year.
Among the sectors that Phillip Research favours are construction, technology, gaming, healthcare and renewable energy, as it shortlisted Gamuda Bhd, Genting Malaysia Bhd, Cape EMS Bhd, UMediC Group Bhd and Uzma Bhd as among its top stock picks.
Concurrently, Wong expects banks to continue delivering healthy growth, particularly in non-interest income, amid a stable interest rate environment and improved market sentiment.
“Additionally, the laggard plantation sector could potentially see a recovery in crude palm oil (CPO) demand from major buyers, reversing the current CPO price weakness. Select plantation companies may also benefit from asset revaluation exercises due to their presence in Johor,” he added.
Despite the US Presidential being an event that could contribute to short-term volatility, he said the FBM KLCI could hit 1,650 points by end-2024, while Phillip Research is targeting for the lead index to inch towards the 1,700 mark by year-end.
At the same time, Apex Securities sees the key index oscillating within the 1,580 to 1,630 points range while its top picks are AME Elite Consortium Bhd, QES Group Bhd, Tasco Bhd and Solarvest Holdings Bhd.
