The negative news flow avalanche accumulating in recent months has presented new challenges for the market to overcome. Satisfactory resolutions to political disagreements and governance concerns wouldbe major catalysts. Oil price recovery remains on track while the global economy’s rehabilitation ought to be reaffirmed by US interest rate normalisation. Resilient domestic demand would help to engineer a gradual corporate earnings turnaround.
Potent cocktail of negatives. The collapse in oil and other commodity prices occurred in tandem with a renaissance in the USD on an imminent rise in US interest rates. Weaker oil has given rise to domestic fiscal concerns, given that Malaysia is ASEAN’s only net oil & gas (O&G)exporter. Its vulnerability is underscored by the high foreign ownership in financial assets The bull market in North Asia has hastened a sell-off in ASEAN markets, while escalating domestic political tension and other governance concerns have made investors increasingly nervous. The deteriorating situation in Greece ought to keep investors on tenterhooks. This potent cocktail of negative factors is a recipe for volatility in financial asset prices, as the market works through these challenges going into 2H15. Although sentiment remains bearish, we see the market remaining well supported on the downside, with foreign investors already grossly underweighting Malaysia. The unexpected affirmation of the country’s credit rating and the lifting of the outlook back to stable by Fitch Ratings (Fitch) will lift the market and the MYR.
Do not lose sight of market catalysts. While the oil price recovery has been shallower than expected, it has tracked expectations directionally. e now expect Brent to average the year at USD67.30/barrel (bbl) from USD72.50/bbl before moving to USD80/bbl in 2016. Lower oil will grease the economic health of developed economies, while its gradual recovery should banish domestic fiscal concerns. The expectation for US interest rates to lift-off in September ought to remove the overhang for emerging markets, concurrently reaffirming expectations that the US (and global) economic recovery is intact. We believe corporate Malaysia is well positioned to record growth in earnings this year, after the 4.1% EPS contraction in 2014, by leveraging on investments in manufacturi ng capacity, manpower and technology. As consumers and businesses adjust to the goods and services tax (GST), the earnings outlook should gradually improve going into the latter part of 2015. The impending 1ppt reduction in corporate income tax rate from YA2016 should also be supportive of 2016 earnings growth. A quick and satisfactory resolution to domestic political issues and concerns regarding a certain government-linked strategic development firm will help to lift investor sentiment and stem the portfolio funds outflow, and help relieve pressure on the MYR. We reiterate our end-2015 FBMKLCI target of 1,865 pts based on an unchanged 16.5x 1-year forward P/E.
Still a stock picker’s market. We continue to prefer equities as an asset class. Investors will need to remain nimble and identify stocks with strong governance, good growth prospects, steady cash flows and unstressed balance sheets. Earnings growth remains key to the creation of new shareholder value. Yield stocks are becoming relatively less attractive due to the expected narrowing of the yield gap as the US interest rate moves higher. Sectors that can offer resilient growth include healthcare, rubber products, logistics and utilities. We are also OVERWEIGHT on construction, ports & shipping and technology.
Challenging start to 2015 2015 began with a sell-off across most markets on the back of concerns over global economic growth, deflationary risks and lower commodity prices as the European Central Bank (ECB) manoeuvred to meet market expectations for full-scale quantitative easing (QE). Subsequently, lower crude oil prices helped to lift other regional markets in countries that are net oil importers, as the reduced inflationary pressures would allow for more accommodative monetary policies. Many countries implemented easier monetary policies in 1Q, including Australia, China, Singapore, India and Thailand.
The FBMKLCI rebounded in mid-January, tracking crude oil prices that also saw a bottom during the month. The revision of the 2015 Budget on 20 Jan – to factor in a lower USD55/bbl oil price assumption – helped to reassure the markets of the country’s fiscal health, although the budgeted 2015 fiscal deficit deteriorated to 3.2% (original target: 3%). Petronas did help to balance the books by maintaining its 2015 dividend along with savings from the elimination of retail fuel subsidies. However, this was not sustained, as the bellwether index remained in a range-bound pattern.Comments from Fitch – in a teleconference on 20 Jan – that it might downgrade Malaysia’s sovereign rating helped to deflate sentiment. Externally, the ECB’s announcement of a full-scale QE towards the end of January helped to offset rising concerns of a Greek exit (Grexit) from the Eurozone after the anti-austerity Syriza party was elected to power in Greece. Better-than-expected 4Q14 GDP data helped to lift the index to a 1Q15 high of 1,825.54 pts on 4 Mar, although it then corrected to 1,778.16 pts as the market digested the implications of another lacklustre Dec 2014 earnings quarter.
Subsequently, the market recovered to a YTD high of 1,862.80 pts on 21 Apr helped by the stabilisation of crude oil prices. At the March US Federal Open Market Committee (FOMC) meeting, the federal fund rate (FFR) was kept unchanged with the US Federal Reserve (US Fed) reiterating its patient guidance. It is also worth noting that foreign investors turned net buyers (MYR156m) in April and remains the only month so far this year where foreign funds were not net sellers. The MYR recovered strongly all the way to MYR3.55 on 28 Apr from MYR3.73 on 20 Mar.
Thereafter, the benchmark index began to slide as the market continued to be broadsided by negative news flow. Political tensions rose as the spat between senior political personalities escalated into the open. More revelations, allegations and concerns pertaining to a strategic development company wholly-owned by the Ministry of Finance (MOF) emerged and boiled over. April also marked the beginning of a bull market in China and Hong Kong (the HSI gained 13% in April). With regional institutional investors’ attention firmly affixed on North Asian markets, portfolio funds flowed out of ASEAN. The announcement of the 11thMalaysia Plan on 21 May failed to excite the market as it contained few new initiatives, highlighting the funding constraints faced by the Government.
The recent June FOMC meeting refocused investor expectations that the US Fed is on track to raise interest rates in 2H15. While this outcome remains data dependent,focusing on jobs and inflation, the expectation for a shallow pace of increase was reinforced. Global equity markets remain concerned after talks between Greece and its creditors stalled, with both parties yet to reach a deal. Investors retained their cautious stance, taking into consideration the possibility of Greece being forced out of Eurozone if it fails to repay EUR1.6bn due to the International Monetary Fund (IMF)by end-June.
The FBMKLCI has slumped 2.9% YTD and is the second worst-performing market in ASEAN behind Indonesia (-5.2%). Sri Lanka is the worst performing market YTD,with a decline of 3.9%. The markets in China were the best performers in Asia so far, with Shenzhen nearly doubling (+76.9%) and Shanghai surging 29.6%. At the same time, the Hang Seng also posted impressive gains (+13.0%) on the back of the “through train” arrangements implemented in 4Q14, which has unleashed an avalanche of retail money into equity markets.On the local front, the telecom, technology, industrial products, consumer and construction sectors were the best performing YTD. Telecom stocks have been seen as a refuge from volatility, while many tech companies are beneficiaries of the strong USD. Construction remains in focus, owing to the maintaining of the Government’s development expenditure programme. Plantations and property were the worstperforming sectors. CPO prices remain lacklustre while the presence of large blue chip companies in the industry has seen solid government-linked investment company (GLIC) ownership levels keep valuations high and unattractive. The property sector continues to be affected by weak consumer sentiment for big ticket spending, resulting in poor take-up rates and slow project launches. On the downside, the plantation, banking, finance and property sectors were the key underperforming stocks, with plantations as the worst performing. Table 3 provides the list of outperformers and underperformers under our coverage.
Source: RHB Research - 8 Jul 2015
Created by kiasutrader | Jun 14, 2016
Created by kiasutrader | May 05, 2016