KUALA LUMPUR (June 26): HSBC Malaysia maintained Malaysian equities on "underweight" despite recent gains, citing pressure on index-heavyweight banks and recent rise in valuations that cap further upside.

The renewed interest is largely due to Malaysia’s rapid rise as a crucial link in the global tech supply chain, HSBC said. Sectors ranging from equipment markers, chip designers to testers, construction companies, and power producers are benefiting from an inflow of foreign investment, it noted.

Malaysian banks, which make up more than one-third of FBM KLCI, face a challenging operating environment, HSBC flagged. “Loan growth expectations for 2024 appear to be modest while net interest margins are expected to stabilise amid intense competition for deposits,” it said.

The KLCI has gained more than 9% so far this year and outperformed its Southeast Asian peers. The gains and improving investor sentiment over the past year come after three years of underperformance and lacklustre interest. Daily turnover for the index reached a record high of US$1.5 billion (RM7.06 billion) in May.

A sharp spike in utilities stocks have lifted the KLCI. Year-to-date, YTL Power International Bhd (KL:YTLPOWR) has surged nearly 90% while Tenaga Nasional Bhd (KL:TENAGA) gained 42% amid the frenzy over data centre demand.

“Malaysia is well-positioned to benefit from the rise in data centres amid increased demand for cloud and AI [artificial intelligence] services, as large tech giants are already investing heavily in the market,” HSBC said.

Meanwhile, robust earnings have propelled top bank Malayan Banking Bhd (KL:MAYBANK) by 16% while closest peer CIMB Group Holdings Bhd (KL:CIMB) has climbed 20% since the start of 2024.

Broadly, consensus expects earnings to grow 17% in 2024 and 9% in 2025. In terms of valuations, the FBM KLCI trades at 14 times the forward earnings, largely on par with its five-year median.

“This does not offer a particularly attractive entry level from a valuation perspective as the recent rally limits room to go further,” HSBC said. “The relative investment case doesn’t seem reasonably attractive, hence, we maintain our cautious view on the market and remain underweight Malaysian equities.”
 

https://www.theedgemarkets.com/node/716858