Better quarter seen for equities

Impending budget and elections predicted to provide boost

PETALING JAYA: After an unexciting third quarter on the back of relatively mixed market developments, investors should start capitalising on any weaknesses in the market to position for stronger upcoming quarters for equities, say analysts.

The impending Budget 2018 to be announced on Oct 27 could also provide a boost to investor sentiment before the 14th general election that needs to be called latest by August next year.

According to Kenanga Research based on its simulation study, the probability of the FBM KLCI hitting its year-end index target of 1,830 points seems high.

This index target is backed by an estimated financial year 2018 earnings growth estimate of 4.6% and a forecast 2018 real gross domestic product growth of 4.9%.

“We have seen the rise of external uncertainties as well as an unexciting third quarter to date. Should our seasonal study be proven correct, the market could be getting better, as normally, the fourth quarter and the first quarter of a new year are relatively stronger.”

The only caveat for now, it said, was probably the absence of a meaningful correction in the third quarter.

“In fact, with the recent hawkish Federal Reserve (Fed) statement, coupled with the geopolitical uncertainty, the recovery could be slower than expected.”

However, it said the FBM KLCI only declined to the low of 1,751.69 points on July 14 from the high of 1,796.65 on June 16, representing a mild correction of only 2.5%.

“Should the index have shown more meaningful corrections, we would have higher confidence in seeing a stronger upswing in the coming quarters on cheaper market valuations,” it said in a fourth-quarter investment strategy report.

Nonetheless, the research firm noted that the valuation of the FBM KLCI looked more exciting on a regional basis. As of end-September, the forward price earnings ratio of the FBM KLCI registered a 4.1% premium over its selected regional peers. This “valuation premium” can be considered to be at the lower end of a historical range of around 4% to 18%, said Kenanga Research.

“So far, we only saw a mild outflow of around RM1bil in September and the third quarter of 2017. The amount of outflow is still pretty manageable as compared to the year-to-date net inflow of RM9.6bil.

“Should the focus of the Fed be on a positive yield curve rather than the short-term interest rate, things may not be as bearish as it seems. Furthermore, as the domestic equity market valuation seems undemanding vis-a-vis the regional peers, we could see a milder foreign capital outflow going forward, unless the US Fed raises interest rates more aggressively than expected.”

Sector-wise, Kenanga Research has “overweight” calls on the aviation, Malaysian real estate investment trust, glove, power utility and technology/semiconductor sectors. At the same time, it sees more “outperform” calls appearing in some of the neutral-rated sectors such as bank and non-bank financial players, oil and gas, plantation and property.

Meanwhile, with crude oil prices on the rise following the production cut led by the Organisation of the Petroleum Exporting Countries or Opec, UOB Kay Hian believes this will give the government some headroom for the forthcoming budget.

It sees the focus of the budget as a continuance of the policy to alleviate the livelihood of the bottom 40% of households.

“We also highlight the trend that past general elections have coincided with strong consumer sentiment.

“As such, the forthcoming budget is expected to provide a boost to sustain the nascent consumer sentiment recovery before the 14th GE is called.

“As such, direct handouts via BR1M (1Malaysia People’s Aid), bonuses and/or salary adjustments for civil servants, affordable housing and public transport infrastructure will likely be the key budget proposals,” it said in its strategy report.

Besides these, it thinks that education will also be a key focus of the government in raising productivity in its bid to become a high-income nation.

UOB Kay Hian has maintained its year-end FBM KLCI target at 1,800 points and has a 2018 target of 1,870, which implies a price earnings of 16.6 times derived using the bottom-up valuation approach.

The FBM KLCI closed 4.89 points higher at 1,759.67 yesterday.