Small and mid-cap stocks, in particular, offer a better risk-reward profile due to strong thematic growth drivers, according to Philip Capital Research.
PETALING JAYA: Investors are recommended to focus on corporates with thematic-driven earnings going into 2025.
Small and mid-cap stocks, in particular, offer a better risk-reward profile due to strong thematic growth drivers, according to Philip Capital Research.
Among the themes that are likely to drive stronger market performance next year are sustained foreign direct investment (FDI) growth, acceleration of infrastructure spending and rapid artificial intelligence or AI adoption.
In addition to these, rising focus on local green energy, expanding data centre infrastructure and glove sector recovery on the back of China tariffs are expected to further boost earnings.
“Banks, construction, technology and gloves are expected to be key earnings growth drivers within our coverage universe.
“Consensus projects FBM KLCI earnings per share to grow 8% year-on-year (y-o-y) in 2025, following a 12% y-o-y growth in 2024,” stated Philip Capital Research in a strategy note.
Looking ahead, the research house remains upbeat on Malaysia’s market, driven by sustained FDI, a stronger ringgit, robust domestic liquidity, positive economic trend, corporate earnings growth and the realisation of multinational corporations’ investment commitments.
Its end-2025 target for FBM KLCI is 1,750 points.
However, it noted that trade uncertainties under incoming US president Donald Trump will be a downside risk to the world, including Malaysia.
On several occasions, Trump has proposed imposing tariffs as high as 60% on Chinese goods and a blanket 10% tariff on all US imports.
“Such measures could reshape the global trade landscape, with Malaysia not spared from these potential economic repercussions.
“Although Trump’s tariff policies may negatively impact global trade, the escalating US-China trade tensions could present new opportunities for other countries, particularly those in the Asean region, which has been a growing hub for FDI in recent years.
“For Malaysia, a key player in the region, these shifting global trade dynamics could help strengthen its position in the global supply chain, particularly as trade between the United States and China faces increasing disruption.”
On the possibility of the US Federal Reserve maintaining a relatively high interest rate to counter Trump’s inflationary policies, Philip Capital Research said the implications for global capital flows and economic growth could be far reaching.
“Emerging markets, including Malaysia, may face significant challenges, as tighter US monetary policy could trigger capital outflows and put additional pressure on the ringgit.”
It expects the ringgit to end 2025 at RM4.30 per US dollar, from the current RM4.50 level.
Commenting on this year’s market performance, Philip Capital Research said the year 2024 has been favourable for large-cap stocks, with the FBM KLCI delivering a solid year-to-date return of 9.7%, outperforming the FBM Small Cap which posted a return of 7.2%.
Investors have largely gravitated towards large-cap stocks, driven by strong growth in several key sectors, particularly construction, property and utilities.
A major factor driving this outperformance has been the expansion of data centre developments, which has significantly boosted contractors’ order books.
The surge in infrastructure projects has not only invigorated the construction sector but has spurred an increase in land transactions, particularly in Johor, due to the growing presence of data centres.
Moreover, the property market has been further bolstered by the Johor-Singapore Special Economic Zone expansion, which has attracted local and international investments.
“The banking sector also showed strong performance, driven by a valuation re-rating and a sharp increase in non-interest income, which boosted banks’ earnings.
“Net interest margin expansion further supported growth by optimising funding costs,” it added.
The research house also said that the Malaysian stock market has seen increasing participation of government-linked investment companies (GLICs).
Historically, foreign flows have been the key determinants of the FBM KLCI’s performance. However, their impact has been less pronounced of late.
While the foreign shareholding level remained low at 20.1% as at end-November 2024, the FBM KLCI has appreciated by 9.7% in 2024.
“This positive return has largely been driven by increased participation from GLICs. Notably, the Employees Providend Fund has raised its stake in Malaysia’s equity market to RM188bil, representing 9% of total market capitalisation, higher compared to the historical five-year average of 7.8%.”
