KUALA LUMPUR (March 4): Analysts maintained their positive outlooks for the FBM KLCI nearing or even surpassing the 1,600 mark, with potential catalysts still evident, despite the mixed responses to a slowing earnings season having negligible impact on overall sentiment.

According to Kenanga Research, the earnings momentum of KLCI component stocks in the fourth quarter of 2023 (4Q2023) moderated from the previous quarter (3Q2023), with 14% beating consensus, 52% meeting expectations and 27% falling short.

Against its projections, earnings momentum came in 72% above or in line with expectations, while 29% missed, according to the research house in a note on Monday.

Overall, analysts’ 2024 earnings forecasts for the bellwether index saw minor adjustments.

UOB Kay Hian raised its 2024 KLCI earnings growth forecast by 0.7 percentage points (ppt) to 17.2%, while Kenanga Research adjusted its target to 16.3% from 14.4%, largely due to low base effect, as actual financial year 2023 (FY2023) earnings came in slightly lower than its forecast.

However, AmInvestment Bank cut its 2024 net profit growth forecast for the key index to 13.4% from 14.7% as 2023 earnings came in 1% above its expectations, while RHB Research cut its projections by 0.9 ppt to 11.2%.

This compares to a consensus 2024 KLCI earnings forecast of 18.7%, according to a TA Research note on Monday.

Nonetheless, analysts' end-2024 KLCI forecasts remain largely untouched, as macro upside themes remain intact.

On the trailing end of bullish market watchers, Kenanga retained its 1,605 target on an unchanged 15 times 2024 forecasted price-to-earnings (PER) ratio, in line with a historical PER range of 14-16 times post-economic reopening in 2021-2022.

Meanwhile, CGS International appeared the most bullish, further encouraged by the key index’s gains in the year thus far, by maintaining its 1,755 end-2024 target.

“Our bullishness on Malaysian equities is underpinned by our beliefs that three key headwinds (policy, currency, and earnings) that affect the market between May 2018 and July 2023 could collectively turn into tailwinds in 2024,” CGS International said in a note on Monday.

“These are policy inconsistencies turning into ‘clarity and continuity’; ringgit weakness turning into strength and anaemic earnings trends turning into double-digit profit growth.

“Overall, it seems the earnings tailwind is underway, while the policy momentum should pick up in the next few months. Ringgit appreciation, however, remains elusive, although we still see US inflation coming off sharply by mid-year, leading to the US Federal Reserve to start the federal funds rates (FFR) cuts,” it added.

Kenanga concurred, noting that with advanced economies’ central banks poised to cut rates from June 2024 — based on the latest FFR futures — emerging market (EM) assets will become attractive again given a lower risk-free return of development market assets.

“Policy easing in advanced economies will also set in motion a more synchronised global economic recovery, fuelling an export boom in the largely still export-dependent EM economies,” the research house said.

“We expect the local market to lift off in a way likened to a rocket propelled by three booster engines in succession,” it added.

While AmInvestment Bank acknowledged that foreign equity flows poorly correlate with US dollar and ringgit exchange rates on a one- to 10-year scale, it noted that it has a negative correlation of -0.74 over the past 10 years and -0.67 over the last three years.

“This could mean that a stronger ringgit towards the end of the year could mean a reversal in foreign equity inflows that has helped propel the KLCI over the past two months,” it said.

Nonetheless, AmInvestment upgraded its base-case end-2024 KLCI forecast to 1,550 from 1,545 given that Malaysian equities offer potential ringgit appreciation, improving corporate earnings prospects, compelling dividend yields of 4% and low foreign shareholding low of 19.6%.

AmInvestment also pegged a worst-case scenario forecast of the KLCI settling at 1,340 at end-2024, translating into a 2024 forecasted PER of 12.5 times at -1 standard deviation below the five-year median. The research house said its pessimistic forecast was due to a worst-case scenario of a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts.