The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) was trapped in downward choppy trade last week, with investors kept sidelined after stimulus measures announced by the Chinese government underwhelmed, raising concerns over the country’s economic growth momentum. Market sentiment was also cautious following Donald Trump’s election victory due to worries over potential rise in US-China trade tensions.

For the week, the FBM KLCI slumped 28.8 points, or 1.78 percent to 1,592.44, with most of the losses coming from Mr. DIY (-34sen), Petronas Chemicals (-37sen), Press Metals Holdings Berhad (-26sen), Genting Malaysia (-11sen) and Sime Darby (-11sen). Average daily traded volume last week decreased slightly to 2.87 billion shares versus 2.97 billion shares the previous week, while average daily traded value mildly dwindled to RM2.43 billion, against the RM2.57 billion average the previous week.

Concerns about prevailing risks and continuity in the net foreign selling, which persisted in the last four weeks, could sustain the downside pressure on local equities despite their largely oversold conditions. Nonetheless, selective buying interest in index heavy weight banking sector and domestic sectors like construction, power, utilities, and telcos are expected to limit the selling pressure while investors look for drivers that could contribute to an oversold rebound as expectations buildup for a possible year-end window dressing activity next month. Prospects of a resilient domestic economy and encouraging corporate earnings could help to buffer the negative sentiment caused by worries about heightened trade war post Donald Trump’s victory and prolonged structural weakness in China’s economy.

True to form, Malaysia’s 3Q24 gross domestic product that was released last Friday came at a tad slower than 2Q24’s 5.9% YoY but was in line with the Department of Statistics’ advanced estimate and market expectations of 5.3%. It was driven by growth in all economic sectors, except mining, especially the Services and Manufacturing that grew by 5.2% and 5.6% YoY, respectively. The highlight was the construction sector, which continued to grew at a rapid double-digit pace of 19.9% YoY after surging by 17.3% YoY in 2Q24. Meanwhile, total spending and investment were the main catalysts of the economy on the demand side, which offset the contraction in net exports. In a nutshell, the economy grew 5.2% YoY in the first nine months of 2024 but we anticipate the full year growth to be slightly lower at 5.0% due to continued moderation in economic performance, no thanks to subdued external demand.

Looking ahead, the economic growth is expected to remain resilient next year (4.8% to 5.3% with 5.1% acting as a midpoint) underpinned by solid domestic activities as consumption receives a boost from strong labour market, civil servants’ salary hike, a RM200 increase in minimum wages to RM1,700 and robust tourism activities, and increase in private and public investments as foreign and domestic direct investments continue to flourish. While trade wars, especially between the US and China, could dampen global trade and affect Malaysia’s exports, the “China Plus One” strategy pursued by the global producers since 2017 to mitigate the impact of higher taxes on Chinese exports by the US should continue to work in favour of Malaysia, if the disparity in tariffs imposed on China and Malaysia is significant. (Please refer to our economic report on 3Q24 GDP today for more details).

On corporate earnings, the 3Q24 results reporting season will be concluded next Friday. So far, only about 30% of 104 companies under our coverage have announced their results, with 55% of them coming within expectations, 32% below and 13% above. The underperformers were mainly in the construction and consumers sectors while the oil and gas players outperformed. However, nothing is conclusive yet as many index heavy weights have not disclosed their earnings and the full year growth could still turn out to be a doubledigit number due a lower base in 2023. We forecast a stronger earnings growth of 11.7% for the FBMKLCI in CY24 driven by the Banking, Oil & Gas, and Power & Utilities sectors. Earnings growth is expected to remain favourable in CY25 and CY26 at 7.5% and 6.3%, respectively. Valuation-wise, the benchmark index is trading at undemanding consensus CY25 PER and P/Bk of 13.5x and 1.3x versus comparable peers’ 12.5x and 1.5x, and its 5- year (2020-2024) average of 17.1x and 1.5x, respectively. Thus, we continue to believe current price weakness in domestic equities, caused by the outcome of US elections and prolonged weakness in China’s economy, as an opportunity to bottom fish. Any unexpected cut in China’s loan prime rate this week could act as a positive surprise after a mixed outcome from stronger than expected retail sales and weaker than projected property sales last week.

Source: TA Research - 18 Nov 2024