MIDF Research: Bursa likely to track higher on stronger ringgit
KUALA LUMPUR: The stock market next year is expected to leave behind the uncertainties of the second half of this year and track higher on a stronger ringgit and growing corporate earnings.
Uncertainties ahead of the 14th general election (GE14) have made for uneasy trading over the past few months, but that has not stopped foreign investors from snapping up Malaysian equities.
According to MIDF Research’s weekly fund flow report, foreign investors bought close to RM500mil of local stocks last week, a level not reached for the past seven months.
Cumulative foreign net purchases year-todate crossed the key RM 10bil mark to reach RM 10.2bil – the highest since the third week of September.
“The heavy foreign buying coincided with the FBM KLCI reaching the highest close since Oct 10 at 1,759 points,” said MIDF Research.
“It is noteworthy that the foreign inflow was in line with other regional peers, notably South Korea, Taiwan and the Philippines amid positive developments in the United States’ tax overhaul plan.”
Despite the confidence shown by foreign investors, heartened by a rebound in the ringgit, the FBM KLCI has been lagging in the second half of the year despite a stronger ringgit against the US dollar and better-than-expected economic growth, said MIDF Research.
The ringgit is one of the best-performing currencies among the emerging markets this year, whereas the economic growth has been revised upwards several times this year driven by export numbers.
On the other hand, the benchmark FBM KLCI was down by 1.9% in the second half of the year, making it one of the worst-performing markets in the region.
MIDF Research head of equity strategy Syed Muhammed Kifni Syed Kamaruddin said the FBM KLCI has been trading sideways since the beginning of the year, as investors are cautious ahead of GE14.
“The market has been under selling pressure in the last few months because of election uncertainties,” he told reporters at MIDF Research’s outlook for 2018 briefing yesterday.
He expected the market to end the year at 1,750 points, but it could rebound next year to as high as 1,900 points especially after GE14, driven by sustained corporate earnings growth.
“We expect the market to pick up and move in tandem with the corporate earnings performance.
“If you recall, on the Monday right after GE13, which was on May 5, 2013, the FBM KLCI gained more than 100 points,” Syed Muhammed Kifni said.
He pointed out that the forecast of its 2018 KLCI performance was based on a price earnings ratio of 16.5 times.
The ringgit has been among the best-performing currencies in the emerging markets, up by almost 10% against the US dollar so far this year.
Aside from the stronger ringgit, Syed Muhammed Kifni said that stable crude oil and palm oil prices would further shore up the market and economy.
However, head of research Mohd Redza Abdul Rahman said that the market should be mindful of the potential three interest rate hikes by the US Federal Reserve next year that would cause a knee-jerk reaction to fund flows.
“But eventually, prices will catch up with the earnings growth momentum,” he said.
The research house expected corporate earnings to grow by 7% this year, and 6.6% in 2018, driven by the banking, healthcare and plantation sectors.
Mohd Redza expected the ringgit to end the year on a higher note at RM4.05 a dollar on the back of robust economic growth.
“We expect the momentum to continue in 2018, where we expect the ringgit to strengthen to RM3.95 per dollar next year,” he said.
Meanwhile, MIDF Research’s chief economist Kamaruddin Mohd Nor expected Malaysia’s economy to grow by 5.5% next year, which is slightly lower compared with this year’s forecast of 5.8%.
Malaysia’s economy grew 6.2% in the third quarter of this year.
“The numbers for 2018 are still good, considering the high base effect from 2017 and the slower rate in global economic growth,” he said.
“We estimate there would at least be a single rate hike in 2018 by Bank Negara to 3.25% from 3% currently,” he added.
On the US market, which has been on a nine-year rally, Syed Muhammed Kifni said should there be a correction, the effect would not be substantial as the FBM KLCI has been underperforming since June this year.
On a year-to-date basis, the KLCI is up about 7%. Other markets such as the Hang Seng in Hong Kong and Kospi in South Korea are up more than 30% and 18%, respectively.