PETALING JAYA: Affin Hwang Investment Bank Research (Affin Hwang Research) is maintaining its “overweight” call on Malaysia’s strategy as it registers factors that are set to boost the economy for the remaining half of the year (2H24).
The research house reiterates its call on the Malaysian market with an unchanged year-end FBM KLCI target of 1,700, based on target 2024 price-earnings ratio of 15.8 times or 0.5 standard deviation below the 10-year historical mean level.
Affin Hwang Research said for the first half of 2024, the stocks that outperformed the market were those that benefited from these themes, mainly in the construction, electronic manufacturing services, property, renewable energy, technology and utilities sectors.
“We believe the flow-through benefits of rising foreign direct investment (FDI) inflows are the development of local supply chains and rising demand for bank and capital market financing,” it said.
In its report, the investment bank said the key themes that will continue to drive market and sector performance for the rest of the year includes re-industrialisation and date centre (DC) expansion driven by foreign direct investment (FDI) inflows, energy transition and renewable energy resource development; structural reform of the economy; and state government economic drivers.
Affin Hwang Research said Malaysia is entering a virtuous investment cycle sparked by the surge in (FDI) inflows.
Notably, the FDIs in the electrical and electronic (E&E) sector and DC expansion in Malaysia is driving demand for electricity, water, land and supporting infrastructure.
“DC’s require high electricity and water supply to operate, and large tracts of land to develop DC campuses.
“The land grab for new DC’s over the past year, especially in Klang Valley and Johor, has benefited land owners due to high transacted prices,” it said.
Affin Hwang Research said as these new projects are implemented, the capacity expansion for power will be spurred, especially for renewable energy due to the sustainability commitments for some DC operators and E&E multinational companies and water to meet rising demand.
According to Affin Hwang Research, another positive factor for the country is the continued benefit from global trade and investment diversion due to the ongoing US-China trade war and the US-led efforts to throttle China’s chip industry.
Newly committed investments by players like Infineon, Intel and Texas Instruments into Malaysia has underscored this trend.
On top of that, the moratorium by Singapore on the new DC expansions in 2019 to 2021 led to the influx of new investments in Malaysia and the proliferation of information and communication technology investments from global technology giants.
“We expect the improving confidence of foreign direct investors in the Malaysian economy and political stability will support the recovery in confidence of foreign portfolio investors in the Malaysian equity market,” it said.
Additionally, the FBM KLCI rallied 9.3% year-to-date, outperforming the 8.6% year-to-date increase for the MSCI ex Japan.
The FBM KLCI had also reached a three-year high of 1,632.79 on May 23, 2024.
The investment bank said it expects the FBM KLCI to continue its outperformance on the back of sustained foreign portfolio inflows as the ringgit strengthens and local institution buying support in the second half of this year.
It said it expects the US Federal Reserve to start cutting the Federal Funds Rate in September to support the economy, possibly a total of 50 basis points in 2024.
“We believe a confirmation of the pivot to rate cuts is more important than the quantum as a signal to foreign exchange markets, leading to the potential weakening of the US dollar and the strengthening of the ringgit,” it noted.Affin Hwang Research said its economist forecasts the benchmark overnight policy rate to remain at 3% in 2024 to support economic growth and the ringgit to strengthen to RM4.40 to RM4.50 to US$1.00 by the end of 2024.
