What happened: Had the market been overly-pessimistic with earnings expectations? Or are companies turning the corner even amid external headwinds? The current result reporting cycle followed through from (and bettered) the immediate preceding one with the number of earnings surprises trumping (quite resoundingly) the number of disappointments again. Still too early days to signal a turnaround in the earnings picture, the signs are encouraging nonetheless. For the current quarter, cyclical sectors like oil and gas (3 surprises from 9 under coverage) and construction (2 surprises from 3 under coverage) appear to be the winners, many of which saw improved business flows. Even the furniture (3 surprises from 3 under coverage) sub segment of the consumer sector performed above expectations again, beneficiary of strong US consumption despite aggressive interest rate hikes there. The broader consumer (3 surprises from 8 under coverage) also saw encouraging numbers as a result of improved consumption spending. In essence, the surprises were relatively broad-based.

Earnings adjustments were, more or less, reflective of the surprises and disappointments, with revisions made to account for stronger growth prospects and margin improvements, and vice versa.

On the balance, the earnings trend has improved noticeably, with hits (above and/or in-line) and misses at 85%:15% vis-à-vis the 71%:29% as at 2QCY22.

What we see: We mentioned in the 2Q CY2022 result round-up piece that market volatility had been taken up a notch since the previous earnings reporting period (end May). Cue 3 months later – the pattern is repeated, in eerily similar fashion. What this does amplify is the fact that the market remains a very trading-oriented one over the near to medium term. The market is currently trading at 1 SD (standard deviation) below its very long-term average (since 1993). From a shorter-term perspective (since 2015), the market is currently trading near 2SD below its average. While the coming year is expected to be another challenging one for Malaysian equities, downside is appearing to be increasingly limited unless there is a global meltdown.

Medium-term market direction will continue to be dictated by concerns over external developments. In the short term however, the challenge will now come from forming a government amongst the various coalitions in the Unity Government, one which is able to propel the country to its next level of growth, assuaging market concerns.

The current reporting cycle did not see major revisions to earnings of index component stocks, with the exception of CIMB Group (ours), PPB Group (consensus) and minor tweaks on the banking and gaming components. The 2022 earnings basket is now expected to contract 1.9% (@2Q22: -3.5%) while the 2023 earnings basket will expand by +5.4% (@1Q22: +8.3%).

While the changes will result in a lift to the earnings basket, we trim our year-end 2022 closing for the FBM KLCI to 1,510pts (1,580 points previously) as we lower the earnings multiple to 15x (based on -1SD to the FBM KLCI’s short-term average) to account for prevailing (weaker) market sentiment.

For stocks, we continue to suggest a mix of cyclical names to capture upsides from returns to business normalcy, and stocks likely to see multi-year growth stories, though with an added eye on earnings stability in light of increasing macro headwinds

Source: PublicInvest Research - 2 Dec 2022