Market sentiment seen remaining fragile
This follows a mixed Q3 and lack of catalysts going forward
THE latest third quarter earnings reporting season that concluded on Thursday saw a mixed bag of results across the board.
While corporate earnings seem to have seen a slight improvement year-on-year, analysts say that sentiment towards the market remains fragile, with no significant boost from any particular sector for the year ahead.
According to Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew, blue chip counters had performed better during the latest quarter compared with the small caps, which he said had been a “small disaster”.
“The latest results season has been quite mixed so far, in general, blue chips have done better than small caps.
“It is hoped that the improvements in earnings for the quarter, while very slight, will help improve sentiment. At this juncture, anything that will help improve sentiment is welcome,” he says.
He says there had been much anticipation about the earnings of the oil and gas sector, and notes that results had improved across the board.
“Moving forward, I am optimistic the sector is turning around. It will just take some time for the recovery,” he says.
The oil and gas sector has suffered due to a long spell of oversupply, and idle assets in the support services segment has prevented margins from improving.
Oil prices, however, have now strengthened to over US$60 per barrel since the collapse in 2014.
Pong notes that the effect of the long oversupply situation is slowly wearing off.
While the industry will not see an immediate improvement, he says it will be gradual.
“Some companies will do well, especially those that recently raised funds at the end of the down cycle or after the cycle.
“The companies that are well placed to take on jobs and not highly leveraged will do well in the near future,” he says.
Among oil and gas counters, Petronas Dagangan Bhd (PetDag), the marketing arm of Petroliam Nasional Bhd or Petronas, saw its net profit more than triple year-on-year to RM761.8mil in the third quarter ended Sept 30, 2017.
Petronas Chemicals Group Bhd’s quarterly net profit rose marginally, while UMWOG recorded its first quarterly profit in two years.
The group’s bottom line for the third quarter returned to the black as rig utilisation rates improved to 90%.
In the plantations sector, Pong says earnings were mixed as some companies did well, while others underperformed.
Among the notable counters were Felda Global Ventures Holdings Bhd (FGV) which posted its third straight quarter of rising net profit, with earnings rising to RM38.8mil.
Based on Bloomberg consensus, all plantation counters came in within or below expectations for the quarter.
Technology stocks, on the other hand, did not disappoint, he says.
“Sentiment at the moment is bad because of a poor overnight close for technology stocks in the US last week.
“The Philadelphia Semiconductor Index was down by a sharp 4.4% overnight on and this pushed sentiments down for technology stocks here as well,” he said.
The index had seen its biggest drop of the year overnight on Wednesday, weighing on Asian markets.
Despite strong results during the recent quarter, Pong notes that moving forward, the industry will be losing one of the factors that had contributed to their performance.
“The technology sector was a beneficiary of the weak ringgit and with the currency strengthening, they will lose this factor.
“Globally, the technology sector will power on, with the next driver potentially being electric vehicles.
“But it remains to be seen how many Malaysian players will be participating in this,” he adds.
Banking sector
As for the banking sector, the overall earnings have been modest with gainers and losers mostly offseting each other.
“Overall, there has not been much of a boost for the sector.
“Up ahead, a rise in the overnight policy rate (OPR) has been hinted, and this will give short term boost for interest margins for banks,” he says.
Overall, he notes that Malaysian banks are well placed capital-wise and this is a result of their slow asset growth.
“Our banks haven’t been building up their assets aggressively and have been very strong in terms of capital.
“Hopefully, this will enable them to finance the expansion of the economy in the long term,” he says.
In the short term, however, he does not see much reason to promote banks.
Banks’ earnings for the quarter were mostly within Bloomberg concensus expectations.
Malayan Banking Bhd‘s (Maybank) net profit crossed the RM2bil mark in the third quarter as it saw a pickup in business and loan growth as well as market sentiment.
The country’s largest banking group by assets reported that its net profit rose 12.9% to RM2.02bil from RM1.79bil in the same period a year ago.
CIMB Group Bhd’s net profit increased 10.6% year-on-year to RM1.13bil, boosted by higher interest income and net non-interest income.
Affin Holdings Bhd, on the other hand, saw net profit nearly halve to RM73.26mil.
In the consumer segment, Pong notes that stocks continue to lag as concerns linger about the ability of households to spend.
“Household liquidity has improved modestly but we don’t have a sense that consumers are ready to spend again yet, although many are expecting an improvement for next year,” he says.
Among the factors supporting this, he says, are the strengthening ringgit and the impact of the higher GDP growth seen in the third quarter, which is expected to flow through to household income.
The outlook for the property sector, he says, remains uncertain as sentiment continues to weaken.
“There are reasons to be cautious and reasons to be optimistic.
“There is indication that sales have improved, but this is mainly due to focus on affordable housing.
“While this has helped raise approval rates from banks and sales levels, we don’t see much impact on the bottomline,” he says.
On the recent freeze on the development of high-rise luxury residential projects, Pong notes that this is still being contested, and the outcome of this will have to be monitored.
Malaysian property players came in mostly below and within expectations of Bloomberg consensus.
In the construction sector, earnings were moderate, despite the slew of infrastructure contracts dished out.
“Despite strong contracts in construction sector, such as from the LRT3 project, it has done very little for the construction index,” Pong says.
Overall, Pong sees a very “fragile” situation for the stock market, and is neither strongly positive or negative for the year ahead.
“Sentiment is still fragile.
“It will not help if there are weakening prospects for China as it will be seen as a hit to commodity-producing countries like Malaysia.
“This could put a dampener on optimism for markets like ours,” he says.