KUALA LUMPUR: The Malaysian equity market remains relatively undervalued, as the FTSE Bursa Malaysia KLCI (FBM KLCI) is trading at a price-to-earnings ratio (PER) below its long-term average of 17.1 times.

Bank Muamalat Malaysia Bhd chief economist Dr. Mohd Afzanizam Abdul Rashid said that there is an upside potential if the PER returns to its long-term average. 

"Given that Malaysia's economic growth prospect is still intact and there is strong resolve by the government to enact economic reforms, it would eventually attract foreign fund inflows. 

"Good growth prospects should translate into better corporate earnings among the listed firms," he told Business Times. 

According to Afzanizam, banks, construction, technology, plantation, and power sectors are the key sectors that would drive the local equities. 

He noted that Bank Negara Malaysia is likely to maintain the overnight policy rate (OPR), which would help ensure stability in net interest margins (NIMs) among banks. 

He said that higher development expenditure and a slew of foreign investments into data centres would help propel interest in the construction firms, as there will be more jobs available to the players. 

"Technology sector, especially in the semiconductor space, is expected to experience better growth ahead, with World Semiconductor Trade Statistics (WSTS) projecting global semiconductor sales growth of 11.2 percent in 2025 from an estimated 19 per cent growth this year. 

"Additionally, the move towards biofuel and renewable energy would sustain the palm oil prices," Afzanizam said.

CIMB Securities maintains a positive outlook for Malaysia's equity market in 2025, supported by robust earnings growth as the banking, construction, and utility sectors continue to benefit from the Madani economic policy.

The research firm highlighted additional catalysts, including the potential rollout of "value-up" initiatives, strong domestic liquidity, a healthy pipeline of initial public offerings (IPOs), and opportunities for mergers and acquisitions (M&A).

While the incoming Trump administration's tariff threats pose risks to global growth, CIMB Securities noted that certain Malaysian sectors, such as rubber gloves, could see potential benefits.

The firm also reaffirmed its end-2024 KLCI target of 1,635 points and revised its end-2025 target to 1,763 points.

"We forecast KLCI to deliver strong earnings growth of 8.0 percent in 2025 versus 12 per cent in 2024 and 5.0 per cent in 2023, marking a third consecutive year of growth. 

"The earnings growth is driven by Madani government policies—the National Energy Transition Roadmap (NETR), Johor-Singapore Special Economic Zone (JS-SEZ), New Industrial Malaysia Plan 2030 (NIMP)—and strong foreign direct investments (FDIs), including significant investments in data centres," it said in a research note. 

CIMB Securities also expects robust gross domestic product (GDP) growth of 5.2 per cent for 2024 and 5.0 per cent for 2025, fuelled by strong domestic demand and a broad-based export recovery. 

It noted that the potential plans to introduce programmes to enhance shareholders return of listed companies (similar to the Value-Up programmes in Japan and South Korea) could boost foreign investor interest in Malaysia. 

It projects the ringgit to appreciate 2.2 per cent against the US dollar by mid-year to RM4.35/US$1, which is likely to attract higher foreign fund inflows. 

Higher inflows, coupled with strong domestic liquidity, are expected to support an expansion in price-to-earnings (P/E) valuations. 

The firm added that Malaysia's improved environmental, social, and governance (ESG) rating, as well as enhanced sustainability reporting requirements, is expected to attract foreign investors. 

"Looking ahead to 2025, we believe that a higher net buy by foreign investors will be a key catalyst for expanding market valuations. 

"Currently, non-strategic foreign shareholding levels for KLCI stocks stand at just 16 per cent, compared with the historical high of 20 per cent.  

"Our deep-dive analysis reveals that foreign investors largest holdings are concentrated in the banking, utilities, and healthcare sectors," CIMB Securities said. 

https://www.nst.com.my/business/corporate/2024/12/1151796/malaysian-equity-market-still-fairly-undervalued