KUALA LUMPUR (Sept 4): Renewed concerns on weakness of the US economy could further weigh on Malaysian technology stocks already under pressure from recent earnings disappointment and a rout in US tech companies, analysts and investors said.

Shares of Malaysian tech stocks fell on Wednesday and analysts said the tepid earnings recovery in April-June quarter points towards slower-than-expected growth, which in turn weighs on valuations, even as long-term orders appear intact.

The recent sell-off could be due to Malaysian tech companies “returning to more fundamental valuations, besides influence by US tech,” said MIDF Research, who is neutral on the sector. 

Rotational play from growth to value or cyclical stocks in the US is also being emulated in Malaysia in the second-half, its head of research Imran Yusof told The Edge. “It may be prudent for investors to remain on the sidelines until we can see a stronger recovery in tech earnings,” he said.

The Bursa Malaysia Technology Index, which tracks 49 stocks, was the biggest loser among local indices with 2.7% decline. That compares to FBM KLCI’s 0.4% dip.

On Tuesday, deeper-than-expected US manufacturing sector contraction in August sparked a drop in US equities, with the Dow Jones Industrial Average down 1.51% and Nasdaq Composite down 0.96% from Friday’s new record high.

The world’s biggest chipmaker Nvidia Corp slid nearly 10% overnight on Tuesday amid other negative news flows on the company, which in turn shook global tech stocks.

Earlier recession fears from weak July jobs data have returned, following August US manufacturing PMI miss, said a fund manager who declined to be identified. “It’s understandable to see investors lock in some gains in the likes of Nvidia after a strong run-up.”

While markets would be highly volatile when the US begins to shift its policy stance, rate cuts would be positive for tech stocks, short of a recession, the fund manager added.

Wednesday’s top decliners among tech players on Bursa Malaysia includes Malaysian Pacific Industries Bhd (KL:MPI), down 74 sen or 2.52% to RM28.64), UWC Bhd (KL:UWC), down 34 sen or 13.99% to RM2.09; ViTrox Corp Bhd (KL:VITROX), down 3.89% or 14 sen to RM3.46; D&O Green Technologies Bhd (KL:D&O), down 16 sen or 5.8% to RM2.60; Greatech Technology Bhd (KL:GREATEC), down 12 sen or 2.5% to RM4.69 and Inari Amerton Bhd (KL:INARI), down eight sen or 2.51% to RM3.11.

At the last level, the Technology Index was trading at 26.8 times forward earnings versus a high of 36 times seen in February, Bloomberg data showed. The index’s five-year average forward earnings in 2020-2024 was 30 times supported by the semiconductor boom which subsided in 2023.

Earnings meanwhile have disappointed, with 10 of 13 top technology stocks by market capitalisation missing forecasts in the April-June quarter. Analysts also cut earnings estimates for 11 of the companies.

“Given the weak demand, there is no significant improvement in utilisation rate which in-turn affects the profit margin,” said Imran. “Nonetheless, the [latest] results further signalled that the worst is over.”

For now, local semiconductor companies have not guided towards weaker demand, said another analyst with a local bank who covers the sector.

Investors, however, should monitor cost and supply chain concerns from the US-China trade war, as well as the strengthening of the Malaysian ringgit for companies whose revenue are collected in US dollar, the analyst said.

https://www.theedgemarkets.com/node/725513