Rakuten Trade head of research Kenny Yee.
PETALING JAYA: Money tied up in the initial public offering (IPO) market is one of the contributing factors to the retail investor segment’s lacklustre performance, despite improvements seen in both the FBM Small Cap and ACE Market indices performances this year, according to Rakuten Trade Sdn Bhd.
Its head of research Kenny Yee said net outflows from the retail investor segment had been prominent, to the tune of about RM4.7bil year-to-date (y-t-d).
“We reckon this could be due to the influx of IPOs of late, which has been mopping up the liquidity, especially from the secondary small-cap space. In the first half of 2024 (1H24), there were 21 IPOs raising about RM2.1bil.
“It is not a matter of how much proceeds that were raised, but it is a matter of the subscription rate.
“For example, Steel Hawk Bhd
which had been oversubscribed by 277 times, had locked in RM1bil for 24.5 million shares at 15 sen apiece. This shows that all the money has been locked up in the subscription of IPOs.
“Hence, retail participation has been on a declining pattern, having shrunk from 26% in January to between 17% and 18% currently,” he said during a virtual media briefing on Rakuten Trade’s fourth-quarter (4Q24) market outlook yesterday.
Yee remains bullish about the local market and expects the FBM KLCI to test the 1,780-point level by the end of the year based on a valuation of 16.8 times price-to-earnings (PE) multiple premised on 16% earnings growth for 2024.
The local bourse is projected to break the 1,800-point level next year, to hover around the 1,810 threshold, based on a “decent” 15.5 times PE.
“The overall sentiment of our market has improved due to political stability, part repatriation of overseas funds by the government-linked investment companies (GLICs), prominent foreign direct investment (FDI), namely on the tech sector, the ringgit uptrend and inflows of foreign funds.
“It may seem far-fetched to hit 1,780 from the current 1665.6 points, but it does not really take much to prop up the index.
“Based on our seasonal studies, 4Q is usually the second-best performing quarter after 1Q. Hence, we expect more fund flows into the market looking ahead into 2025,” Yee said.
Yee noted Malaysia is the top performer within the Asean region, but is trading at a discount to its five-year average valuation of 16.8 times, and followed by Vietnam.
“For the FBM KLCI, looking at the estimated PE for 2025 at 13.9 times, there is still a tremendous value proposition from all our blue chips.
“Moreover, Indonesia, the Philippines and Thailand are all trading below their five-year average PE.
“This is why the Asean market has been shoved to the limelight of late with regards to the flow of foreign funds,” he said.
While fund flows have generally been predominantly dictated by net foreign inflows, Yee said of late local institutions, with net inflows of RM1.15bil y-t-d, may be taking over the reign.
“We expect domestic fund flows to intensify over time, possibly later this year or into next year as well, and take the lead to support or even prop up the local bourse.
“Net foreign fund inflows have touched about RM3.5bil y-t-d.
“We believe a transition or rebalancing of portfolio is happening at the moment strategically focusing within the Asean region amid the easing interest rate regime. Most global markets are taking a breather,” he said.
On Wednesday, the US Federal Reserve (Fed) cut its interest rate for the first time since March 2020 by 50 basis points (bps) to the 4.75% to 5% range from the 5.25% to 5.5% range previously.
“This jumbo cut was higher than my initial expectations of 25 bps. Many market experts are expecting further adjustments in November and December – about a 100-bps cut in total for this year.
“Now, I suppose all the funds are pondering on their next move, whether to put more emphasis on bonds or equities.
“Certainly, they will look at Asean as the next preferred destination for the equity market due to the decent value proposition that the region offers,” Yee said.
Yee added the ringgit is expected to hover between 4.10 and 4.20 against the US dollar by the end of the year.
“If the Fed decides to cut rates further in the next Federal Open Market Committee meeting in November and December, pushing the spread differential between the 10-year MGS and the US 10-year yield wider, we can see the ringgit dipping below the four mark.
“Currently, the spread is around 20 to 30 bps. However, the simple average since the year 2000 is around 80 to 100 bps.
“Moreover, this will give Bank Negara a buffer to reduce the overnight policy rate (OPR) which is at 3%.
“If the spread differential widens even more, it may give the central bank some buffer to potentially lower the OPR by at least 25 bps,” he said.
