Earnings per share the key determinant to FBM KLCI’s performance
KUALA LUMPUR: Observing the trends of earnings per share (EPS) may be the key to identifying the FBM KLCI’s performance.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) saw that historically, earnings growth has been the key driver behind the KLCI’s performance.
“For example, the KLCI last saw an annual gain of 9.4 per cent in 2017, the same year corporate earnings growth grew 7.9 per cent,” it explained in a note yesterday.
“For 2020, the market may however arguably discount EPS growth in 2020 given the current macro predicament.
“However, as markets are forward looking and look beyond 2020, we believe that there is a possibility that the market optimist will be disapointed.
“Thus, we address the “million-dollar” question on everyone’s mind as to whether growth will form a “V” or a “U”shaped recovery.”
AffinHwant Capital’s economist recently downgraded his Malaysia 2020E GDP growth to a contraction of 3.5 per cent, with expectations of a U-shape recovery for the economy and believes that an economic recovery will only materialise in the later part of 2021.
“This leads us to believe that corporate earnings growth will not only decline in tandem with the economy, but likely also linger as the negative impact from Covid-19 and the country’s lockdown filters down to the economy.
“In our view, with major parts of the global economy crippled as their populations are locked down, we believe the impact on global economies will be nothing like those in recent times.
“The sustained economic carnage resulting from business closures, unemployment and defaults and unemployment is likely to reveberate thorughout the global economy, and over a period of time.
“Reduced cash flows of inviduals and business should lead to weakened consumption spending and future corporate investment.
“We also do not discount the possibility of a country’s financial position being stretched.” Thus, AffinHwang Capital said there would be a significant one-off loss of demand that is not replaceable and Covid-19 will have lasting economic damage on the economy while dimming EPS outlook prospects.
“With so much uncertainty at this point, we thus believe it is too premature to factor in a V-shaped recovery as the Covid19 infection and mortality rates are still climbing and without a vaccine in sight,” it added.
“A prolonged pandemic could even lead to a L-shape recovery, in our view.
“As Malaysia’s GDP growth has only contracted twice over the past 20 years – during the Asian Financial Crisis (AFC) and Global Financial Crisis (GFC) – we believe that these would be good references to give a sense to the extent of the corporate earnings contraction during those periods, which fell by 60.1 per cent and 49.1 per cent, respectively.
“Interesting to note, we find that the magnitude of the decline on the KLCI had tracked the quantum of the earnings decline quite closely.” According to Bloomberg consensus, the street is still looking at a 2020E KLCI EPS growth of 2.69 per cent.
Having found that the KLCI tracks EPS growth closely, the KLCI’s year-to-date fall of 15.5 per cent implies either that the street is behind the curve in terms of its earnings cuts, or that the KLCI is expected to recover and end the year with a positive gain.
“In this environment, we however believe the latter is unlikely, given the ongoing downward revisions to global GDP growth and our in-house forecast of a GDP decline for Malaysia.
Consensus EPS is thus likely to be revised down, and be a catalyst for a market derating.
“Taking into account the GD P downgrade, a further OPR cut to 2 per cent, a lower oil price assumption of US$30 and a lower ringgit-US dollar of RM4.30, this leads to a sharper cut in AffinHwang Capital’s KLCI EPS growth to minus 12.7 per cent y-o-y from minus 4.7 per cent previously.
“For the rest of its coverage, the research firm cut its 2020E EPS growth to a decline of minus 14.7 per cent, from minus three per cent previously.”