Strong in­flows into Malaysian mar­ket

But can mar­ket con­tinue fine run?

The Star Malaysia - StarBiz - - Bizwealth - By TEE LIN SAY lin­say@thes­tar.com.my

FOR­EIGN funds are com­ing to Malaysian shores, bump­ing up val­u­a­tions but keep­ing the party at the FBM KLCI go­ing strong.

With penny stocks back to dom­i­nate the vol­umes list, the heady scent of fear and greed is once again pal­pa­ble.

Could this be the last round of song and dance be­fore the “feel good” bud­get is an­nounced on Oct 31?

To be fair, the fes­tiv­ity in Malaysia, is also hap­pen­ing in Asia – mainly fu­elled by a weaker US dol­lar. The euro has strength­ened by some 12.4% against the US dol­lar on a year-to-date ba­sis, while the ring­git has strength­ened 6.68% over that same pe­riod.

Now look at the cor­re­la­tion be­tween the euro-dol­lar ex­change rate and the MSCI Asia ex­clud­ing Ja­pan in­dex. That pair­ing has been close to 90% this year. As the dol­lar cheap­ens, Asian cen­tral banks with dol­lar re­serves be­come richer. Con­cur­rently, liq­uid­ity has flowed into the re­gion.

Be­liefs that the US Fed will not tighten much this year have fur­ther soft­ened the dol­lar, and thus the money pours in.

Malaysia though has al­ways been more of a po­lit­i­cal mar­ket.

It’s true that most mar­ket play­ers are get­ting jit­tery as val­u­a­tions are pricier and elec­tions are lurk­ing.

It is every mar­ket player’s in­ten­tion to make their money and exit the mar­ket be­fore the elec­tions are an­nounced. It’s a fact that mar­kets fall quite dras­ti­cally the mo­ment the an­nounce­ment is made.

For now though, the FBM KLCI is up 8.93% or 146.61 points on a year-to-date ba­sis at Thurs­day’s close of 1,788.42. It’s also trad­ing at a price earn­ings ra­tio of 16.85 times (x).

Are stocks in Malaysia still worth hold­ing at its cur­rent val­u­a­tions, es­pe­cially with a do­mes­tic en­vi­ron­ment that isn’t too strong?

Or is it sim­ply hold­ing up now be­cause of the tor­rent of for­eign in­flows?

For the week ended Sept 8, for­eign funds mopped up RM362.6mil net, ten times more than the pre­ced­ing week, based on trans­ac­tions in the open mar­ket, ex­clud­ing off mar­ket deals. The amount ac­quired by for­eign funds last week was the high­est in 17 weeks.

MIDF notes that for­eign funds were net buy­ers on every sin­gle day of the week, with Thurs­day record­ing the high­est in­flow of RM153.1mil net, the high­est in a day since July 13, coin­cid­ing with the strength­en­ing ring­git and in­creas­ing Brent crude oil price.

It also noted that Malaysia’s in­flow was in line with Thai­land, buck­ing the trend in Asia which ex­pe­ri­enced an out­flow.

Last week’s for­eign buy­ing had brought the cu­mu­la­tive year-to­date net in­flow to RM10.7bil.

For­eign par­tic­i­pa­tion rate was also strong. The for­eign av­er­age daily trade value (ADTV) surged by 29% to reach above the RM1­bil mark for the first time in 10 weeks.

Gross trade for the week ranged from RM936mil to RM1.5bil.

Like­wise, retail par­tic­i­pa­tion edged higher for the week. The retail ADTV in­creased by 9% to RM880mil, stay­ing above RM800mil for six weeks in a row.

Now the bad news...

Fun­da­men­tally though, cor­po­rate Malaysia posted very sub­dued re­sults for its re­cent re­port­ing sea- son, hence throw­ing a span­ner in the works on whether earn­ings can sus­tain the pricier val­u­a­tions of stocks mov­ing for­ward.

Just to quickly re­cap on the sec­ond quar­ter earn­ings, there were more sec­tors that saw dis­ap­point­ment com­pared to the last two quar­ters caus­ing most an­a­lysts to re­vise down­wards their 2017 earn­ings es­ti­mates.

The sec­tors that saw pos­i­tive growth in earn­ings were the banks, avi­a­tion, con­struc­tion, prop­erty, tech­nol­ogy and gloves.

Sec­tors which saw over­all weaker earn­ings were plan­ta­tions, oil and gas (O&G), health­care, auto and build­ing ma­te­ri­als, which fell into the red dur­ing the quar­ter.

Earn­ings from the me­dia sec­tor, apart from As­tro Malaysia Hold­ings Bhd, re­mained weak.

Ke­nanga Re­search head Chan Ken Yew says that based on the posted re­sults, he has made mi­nor ad­just­ments to his earn­ings es­ti­mates, low­er­ing his 2017 net earn­ings growth estimate for the FBM KLCI to 0.4% (from 2.5% pre­vi­ously) but up­graded his 2018 earn­ings growth to 4.7% (from 2.5% pre­vi­ously).

“The higher growth rate for 2018 is partly due to the lower base in 2017 and we have also re­vised up our bank­ing sec­tor earn­ings marginally,” says Chan.

Chan ex­plains that FBM KLCI earn­ings growth has been lead­ing real gross do­mes­tic prod­uct (GDP) growth by one quar­ter.

“And, based on Bloomberg data, we have seen FBM KLCI earn­ings growth reg­is­ter­ing a peak in the first quar­ter of 2017, which is in line with the high sec­ond quar­ter real GDP growth of 5.8%.

Based on our in-house real GDP fore­casts, we reckon that the do­mes­tic eco­nomic growth should be lower, say 5% to 5.2%, in the sec­ond half (5.7% in 1H17). As such, we ex­pect a fairly flat cor­po­rate earn­ings growth rate in the third quar­ter.

Con­sen­sus is also fore­cast­ing the FBM KLCI to grow at a rate of 2.9% in the third quar­ter and de­cline by 11.3% for the fourth quar­ter.

It’s a buy­ing op­por­tu­nity though...

Cer­tainly, its harder to find un­der­val­ued stocks on Bursa Malaysia to­day com­pared to nine months ago.

“Its very hard to find ‘cheap’ stocks on Bursa Malaysia right now. Most stocks have had a good run ear­lier this year. So should we buy now or should we wait? There are many in­stances that the high PE stocks re­main with their high PEs. If many had waited for the PE of the tech stocks to weaken be­fore buy­ing, well they would be still be wait­ing to­day,” says Rakuten Trade US growth vs value his­tor­i­cal per­for­mance re­search vice-president Vin­cent Lau.

On this note, Lau feels that the selower sec­ond quar­ter earn­ings sea­son is pre­sent­ing a good buy­ing op­por­tu­nity for those who had missed the rally in the first half.

“I would view any pull­back as a buy op­por­tu­nity for the next leg up,” he said.

Ke­nanga’s Chan shares the same opinion and feels that in­vestors should cap­i­talise on any weak­ness and start to po­si­tion for the next two quar­ters.

While Chan ac­knowl­edges the rise of ex­ter­nal un­cer­tain­ties, he feels that things should be get­ting bet­ter es­pe­cially when a mean­ing­ful cor­rec­tion ma­te­ri­alises. He says that nor­mally, the fourth quar­ter and first quar­ter are rel­a­tively stronger.

“Fur­ther­more, as the do­mes­tic eq­uity mar­ket val­u­a­tion seems un­de­mand­ing ver­sus its re­gional peers, we could see milder for­eign cap­i­tal out­flow go­ing for­ward un­less the US Fed raise in­ter­est rate more ag­gres­sively than ex­pected. In fact, the quar­terly and year to date net flows are still in pos­i­tive ter­ri­tory.”

As of end-Au­gust 2017, the for­ward PE of the FBM KLCI only reg­is­tered a 6% premium over its se­lected re­gional peers. This “val­u­a­tion premium” is con­sid­ered to be at the lower end of its his­tor­i­cal range of 4% to 18%.

Tim­ing wise, the FBM KLCI is still trad­ing at a mar­ginal dis­count of 4.6% against con­sen­sus in­dex tar­get of 1,860, which is slightly be­low its three-year mean of 4.3%. While it has yet to re­trace to Chan’s ideal Buy On Weak­ness lev­els of 1,745, it has some­what shown early signs of turn­around.

The US mar­ket re­mains very strong

Over in the US and much to the char­grin of most in­vestors, the Dow Jones con­tin­ues to stub­bornly charge north (now 22,203.48).

Ro­bust mar­ket: Chan says that FBM KLCI earn­ings growth has been lead­ing real GDP growth by one quar­ter.

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