HLIB Research projects that the FBM KLCI would hit 1,700 points by end-2024 based on 15.5 times earnings.
PETALING JAYA: There is potential for further upside in the Malaysian equity market, supported by possible foreign inflows due to the narrowing spread between the US federal funds rate (FFR) and the overnight policy rate (OPR).
This narrowing spread, driven by US interest rate cuts, makes the United States less attractive for investment, potentially encouraging fund flows to emerging markets (EM) such as Malaysia.
Further, the current strong ringgit environment should continue to bode well for the benchmark FBM KLCI.
According to Hong Leong Investment Bank (HLIB) Research, foreigners’ underweight position on Malaysia has hit an inflection, and hence, it sees further room for inflows to pour into the local equity market.
“Foreign shareholding in Bursa Malaysia rose to 20.2% in September 2024, marking its third straight month of recovery from its bottom of 19.5% at end-June 2024 – this was also its largest sequential increase (0.4 percentage point month-on-month) in the past two years,” the brokerage noted.
“Our regression model estimates that foreigners’ underweight position on Malaysia (relative to its weight in the MSCI-EM) has taken a noticeable turn in September 2024.
“We estimate that a move by foreigners from its reducing ‘underweight’ position to ‘market weight’ could potentially lead to RM11.5bil inflows to Bursa Malaysia,” it added.
For the first nine months of 2024, total foreign inflows stood at around RM3.5bil.
“A reprieve in foreign shareholding augurs well for the FBM KLCI, given the 70% correlation between the two,” HLIB Research said.
The brokerage projected that the FBM KLCI would hit 1,700 points by end-2024 based on 15.5 times earnings.
This projection was a revision from its earlier estimate of 1,720.
Looking ahead, HLIB Research expects the FBM KLCI to reach 1,810 by end-2025 based on the same earnings multiple.
Meanwhile, AmBank Research noted that the recent 50-basis-point (bps) interest rate cut by the Federal Reserve (Fed) marked a significant shift in US monetary policy, with global impact already evident.
“Investors favour EM assets, and Malaysia stands to capitalise on this shift amid its stable and robust fundamentals,” it stated.
“The market had been pricing in a jumbo 50-bps cut even before the September Federal Open Market Committee meeting anyway, and the trend may persist amid market anticipation of a 75-bps cut by the year-end,” it added.
As such, AmBank Research projected that the ringgit would hover around RM4.15 per US dollar by the fourth quarter of 2024 (4Q24), before strengthening to RM4.05 against the greenback by 1Q25 and RM4 by 2Q25, and RM3.98 by 3Q25.
“We see volatilities in the coming months, but they are unlikely to disrupt the ringgit’s trajectory for now,” it said.
HLIB Research said besides external factors, its optimism on the local equity market was also based on the rejuvenation of domestic fundamentals.
“Our positive stance on Malaysian equities goes beyond the Fed rate downcycle, as the country is seeing rejuvenated domestic fundamentals with gross domestic product (GDP) growth picking up, record approved investments and subsidy reforms in motion, alongside a more stable political landscape,” HLIB Research said.
It maintained its 2024 GDP growth forecast at 5% and expected this growth rate to sustain into 2025 as well.
“We remain upbeat on the following themes that we had earlier introduced for 2024.
“These are the continued robust tourism recovery; the energy transition under the National Energy Transition Roadmap; Johor’s developmental reinvigoration; disposable income boosting measures from Employees’ Provident Fund Account 3 and civil servants’ pay hike; and trade diversion and proliferation of the China+1 strategy from the US-China trade war,” HLIB Research noted.
