FBM KLCI to be driven primarily by multiple expansions in 2019

KUALA LUMPUR: The FBM KLCI will be driven primarily by multiple expansions, analysts project for 2019, due to the return of global liquidity to the emerging markets (EM).

In its ‘Strategy: 2019 Market Outlook Update’, AmInvestment Bank Bhd maintained its end-2019 FBM KLCI target of 1,820 points.

“While there have been downward revisions in earnings following the generally disappointing fourth quarter of 2018 (4Q18) reporting season, we believe the earnings cuts are not significant enough to warrant an adjustment to our end-2019 FBM KLCI target,” the research firm said.

“We hold the view that for 2019, the FBM KLCI will be driven primarily by multiple expansions (as against earnings growth), thanks to the return of global liquidity to the EM, on growing consensus of a pause in the US rate hike cycle, and hence a peak in the US dollar strength, making it more compelling to hold EM assets from a risk-and-return standpoint.”

That said, AmInvestment Bank acknowledged that foreign inflows to the Malaysian equity market in recent months have been less consistent as compared with global inflows into EM equity funds.

The research firm believed this is “transitional” on heightened market risk premium as the new administration rolls out various policy changes that result in short-term pain (including the disappointing 4Q18 corporate performance) but long-term gain to Corporate Malaysia.

“With the economy being put on a more sustainable footing via financial prudence and it being slowly but surely cleansed of rampant corruption, we believe Corporate Malaysia will stand a much better chance of realising its full potential over the long run.”

On forecasts, following the earnings cuts during the 4Q18 reporting season, AmInvestment Bank has revised down its FBM KLCI earnings growth projections for 2019F and 2020F to 2.9 per cent and six per cent respectively, from four per cent and 6.9 per cent previously.

Meanwhile, the actual FBM KLCI earnings growth in 2018 came in at 2.6 per cent versus the research firm’s forecast of 3.3 per cent.

“If we were to comply strictly to our basis for our end-2019 FBM KLCI target, namely 18.5-fold our projected 2019 FBM KLCI earnings, our end2019 FBM KLCI target should drop to 1,798pts following the earnings cuts.

“By maintaining our end2019 FBM KLCI target at 1,820pts despite the earnings cuts, we are effectively raising our multiple to 18.7-fold, which we still consider it to be ‘at about 18.5-fold’.”

“Recall, at 18.5-fold, our target multiple for FBM KLCI is a 1.5-fold multiple premium to the five-year historical average of about 17-fold, largely to reflect the introduction of largely high P/E stocks during the recent rounds of changes to the FBM KLCI constituents such as Press Metal Bhd, Nestle (Malaysia) Bhd, Dialog Group Bhd, Hartalega Holdings Bhd, Malaysia Airports Holdings Bhd and Top Glove Corporation Bhd.”