PETALING JAYA: The economy is expected to chart a stable outlook in the second half of 2024 (2H24) underpinned by the progress made on blueprints, the investment upcycle and a firmer ringgit while a pivot by the US Federal Reserve (Fed) could encourage fund inflows, say fund managers.
Manulife Investment Management (Manulife IM) stated a global easing cycle is already underway with the Fed likely to join the easing cycle by September and if that leads to a weaker US dollar, Asean equity markets like Bursa Malaysia could benefit from inflows.
As it stands, Asian equities are currently trading at a projected price-to-earnings (P/E) ratio of 12 times their estimated earnings for the year 2025, with an expected earnings growth rate of over 15%.
In contrast, US equities are trading at a much higher projected P/E ratio of 21 times their estimated 2025 earnings, with a slightly lower expected earnings growth rate of 14%.
“Asian equities appear to offer more attractive value, providing investors with the potential for higher earnings growth at a lower price relative to US equities,” Marco Giubin, senior portfolio manager for equities at Manulife IM said in an online market briefing yesterday.
He pointed out that in the past 24 years, Asian equities have outperformed global equities 13 times, with nine of them when the greenback was lower. In the same 24 years, Asian equity had underperformed global equities by 11 times, with 10 times when the US dollar was higher.
Another positive for the region is that 2024-2025 world economic growth projections show Asia’s growth is expected to outperform the rest of the world over the period. Manulife IM added Asia has delivered on earnings growth, but underperformance is driven by valuation de-rating
A headwind for the region is the fact that China’s credit growth points to softening activity in 2H24 with the fund manager noting the rescue package for the property sector was too small compared to developers financing needs, but that is because Beijing does not reinflate the bubble in the sector.
The fund manager expects additional monetary and fiscal measures to support the Chinese economy. That said, the growth trajectory for South-East Asia stands out in the region.
Growth prospects remain positive with economies like Malaysia and Indonesia expected to grow by around 5% this year while inflation remains contained.
While policy clarity and the strong investment story has seen Malaysia’s equity market rise some 12% year-to-date, Giubin believes inventors will find the Philippines, Thailand and Indonesia a little more attractive due to the rate cutting catalyst and their lower valuations, while the Malaysian equity market is showing signs of high valuation for sectors like technology that has been driven up by the data centre thematic.
The FBM KLCI closed 7.6 points higher at 1,629.7 points yesterday.
The local benchmark is showing resilience with sustained fund inflows and consensus forecasts that corporate earnings could grow by 17% in 2024 and 9% in 2025.
This has led HSBC Bank Malaysia to forecast the local benchmark to end 2024 at 1,680 points, supported by a sustained growth of the economy.
Meanwhile, Maybank Investment Bank’s (Maybank IB) foreign exchange research head Saktiandi Supaat said possible headwinds for the ringgit include rising domestic concerns about economic plans and blueprints which fail to take off, while strong recovery and external demand, including China, could provide some tailwinds for the local unit.
Saktiandi said the outcome of the US election continues to be a must-watch as the outcome could become a headwind for the region and the impact it may pose to Malaysia’s economic and market outlook.
“We are keeping an eye on this, very closely, as our forecast for the country’s growth is agnostic towards the outcome of the US presidential election.
“The impact on local growth and trade during the Trump 1.0 trade war can be seen in Malaysia’s economic growth, which was down by about 1.5 percentage point from 5.8% in 2017 to 4.4% in 2019.
“In terms of trade volume growth, from a 13% growth in 2017 it dropped by about 2.5% in 2019. Hence, there will obviously be downside risk to our economic growth as a result of another round of trade war, with Donald Trump intending to bring it to a higher level,” he said.
He said Trump’s tariff and tax cut policies can create a more inflationary situation in the US and in turn, US treasury yields could stay high for longer, putting pressure on emerging markets Asian foreign exchange, including the ringgit.
The banking group’s chief economist Suhaimi Ilias said in general the Malaysian economy posted a good performance in 1H24 as political stability has allowed the government to focus on policy making, like the New Industrial Master Plan 2030, the National Energy Transition Roadmap, and the National Semiconductor Strategy amongst others.
“As we track the progress of the blueprints, master plans, roadmaps, and legislations that were announced, two areas where execution and implementation are certainly visible and tangible are fiscal reforms and consolidation, as well as the Johor-Singapore Special Economic Zone,” he said during the virtual briefing on the market outlook for 2H24.
Suhaimi added the investment upcycle is another reason driving the robust economic performance of the country which has translated to a higher equity market as corporate earnings rise.
“Underscoring the investment upcycle is the realisation of the robust approved investments since 2021. The momentum on approved private investment is still there considering the increase of about 30% in the first quarter of 2024 (1Q24). This strong sustained momentum in approved investments are being reflected in actual investment, providing evidence that these approvals are being realised,” he said.
Additionally, the imports of capital goods which rose by 27% year-on-year and the increase in banking system loans to industrial buildings and factories (money is flowing into the construction of semiconductor manufacturing facilities, data centres, logistical hubs, and industrial parks), provide further indication of the realisation of approved investments.
Maybank IB continues to project for the ringgit to end the year firmer at RM4.60 against the greenback, supported by Bank Negara’s foreign exchange (FX) market interventions and repatriate-and-convert measure.
“The ringgit has been trading below RM4.70 against the US dollar for almost two weeks already. At the same time, we believe that efforts by the central bank to stabilise the ringgit to rebuild external reserves through repatriate and convert measures are materialising and taking shape,” Suhaimi said. That could be the tailwind the local market needs to edge higher.
