The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased for five straight trading days last week, falling the most on Friday as profittaking corrections on key utility, oil & gas and telco heavyweights dragged it down from four-year highs. Fresh fears over anaemic economic growth following the release of weak US manufacturing data and downbeat oil prices dampened investor sentiment, while investors remained defensive given the weak economic cues from China and the US, and as the market await the keenly watched US unemployment data for further leads.

In the first week of September, the FBM KLCI dipped 25.68 points, or 1.53 percent, to 1,653.12, with gains on IHH Healthcare (+33sen), QL Resources (+20sen) and Hong Leong Financial Group (+44sen) overshadowed by falls in YTL Corp (-41sen), YTL Power (-36sen), Petronas Dagangan (-RM1.25), MISC (-39sen), CelcomDigi (-17sen) and Axiata (-11sen). Average daily traded volume last week moderated further to 2.98 billion shares versus 3.52 billion shares the previous week, while average daily traded value shrank to RM3.07 billion, against the RM4.13 billion average the previous week.

The FBMKLCI is likely to take cue from the cautious undertone of US financial markets last Friday after the weak nonfarm payrolls data for September raised concerns about a slowdown in the US economy. The S&P 500 dropped 1.7% to 5,408.42 last Friday, notching its worst week since March 2023. The tech-heavy Nasdaq Composite slumped 2.6% to 16,690.83 and the 30-stock Dow Jones Industrial Average fell 401.34 points or 1% to 40,345.41. While the jobs data showed employment grew by 142,000 and the unemployment rate edged lower to 4.2% from a heavily downwardly-revised mark of 89,000 (initially 114,000) and 4.3%, respectively in July, market was nervous about the weak summertime hiring as June and July saw a combined downside revision of 86,000 jobs. Furthermore, it came much below the Bloomberg consensus forecast of 165,000.

The payroll numbers have solidified expectations for the first cut in this interest rate upcycle to begin in the September 17-18 meeting. The FedWatch Tool is indicating a 70% probability for 25 basis points cut while another 30% is showing a steeper reduction of 50 basis points. Fed officials were tight lipped about the magnitude of a possible rate cut post release of the jobs report but implied the economy was not faltering in a manner that would demand a larger reduction. Thus, in our view the central bank is unlikely to push the panic button by declaring a 50-basis point cut but stick to a gradual approach of 25 basis points reduction with options to ease further in November and/or December meetings.

These developments should continue to drive expectations for a stronger Ringgit versus the USD and contribute to sustained inflow of foreign funds into the local equity market to seize the currency appreciation potential at the backdrop of improving economic fundamentals, stable politics, fiscal and structural reforms. Our house view is that the Ringgit is likely to strengthen further to between RM4.15 and RM4.25 against the USD by end-2024. Foreigners have turned strong net buyers in the last three months and have contributed to a net inflow of RM3.04bn in the first eight months of 2024. Still, the foreign shareholding in Malaysian equities is only 19.8% and should rebound to mid-twenties (24.3% in 2014 and 23.1% in 2019 before it dropped to a low of 19.5% in 2023) within the next three years as confidence returns and corporate earnings continue to support expansion in valuation multiples.

To reiterate on Malaysia’s improving fundamentals, it is apparent that domestic demand has been resilient benefitting from the strong public spending, private consumption, as the strong labour market and government measures have encouraged spending, and significant rebound in tourism activities. Besides, Malaysia’s stable politics, forward looking policies and structural reforms have attracted sizeable foreign direct investments into new technologies, especially into artificial intelligence related infrastructures like data centre, which had spillover effects on many sectors like power, construction, property, utilities, etc. It was enhanced further by the “China Plus One” strategy, which we believe have contributed to improving exports in recent months as producers diversify away from China into other South-East Asian markets. So, private investments are thriving as well. The cascading impact from these drivers are expected to contribute to better economic and corporate earnings growth.

Thus, near-term weaknesses in the FBMKLCI, caused by external factors like concerns about a slowdown in the US (weakness in August inflation data this week could support a rate cut decision) and China’s economy (its August inflation and trade data this week may sustain worries that the government is not doing enough to sustain a 5% economic growth this year), geopolitical tensions, etc. should be viewed as a buying opportunity to accumulate undervalued blue chips, growth stocks and domestic plays.

TM and YTLPOWR remain as the preferred big cap growth picks to seize the opportunities from investments into digital economy infrastructures, data centres, networks, servers, 5G, cloud services etc. INARI should benefit as well from the proliferation of new technologies as it drives demand for radio frequency chips, sensors, AI and memory devices, apart from China’s push for self-reliance that will benefit its subsidiary Yiwu Semiconductor. We are keeping GAMUDA, IOIPG, SIMEPROP, SUNCON, INTA and IBRACO for domestic exposure while continue promoting banks (PBBANK & ABMB) as the sector P/Bk valuation of 1.1x is still cheap compared to a peak valuation of 1.9x during the height of the 2014 bull cycle. Consumer stocks FFB and AEON will benefit from greater domestic activities and higher consumption as government incentives, increase in civil servants pay, withdrawal from EPF account 3 and robust tourist arrivals boost demand. From an operational perspective, the stronger Ringgit vis-à-vis the USD should help to lower input costs as well.

In the small cap space, PGF, SCOMNET and VELESTO are recommended. PGF is seeing increased demand for its glass wool insulation products to reduce carbon emission due to changes in building code in Australia and massive infrastructure spending locally. As a landowner with 1,311 acres of leasehold land adjacent to Proton City in Tanjung Malim, it will benefit from Geely’s investments there. SCOMNET is witnessing rising orders for medical devices with the inclusion of new products and shift to whole device products like vascular dialysis catheters that command higher margin. VELESTO will benefit from high DCR, high operational efficiency and robust outlook for crude oil prices as OPEC+ maintain its cut production and the Middle East tensions raised supply concerns.

Source: TA Research - 9 Sept 2024