Asean on the mend
DESPITE global macroeconomic concerns, Malaysia’s corporate earnings in the fourth quarter of 2023 (4Q23) came in decent, albeit with more misses than hits.
Analysts note downward earnings adjustments were not as pronounced as before although the performance trailed some Asean peers.
“4Q23 was a little under expectation. Most earnings fell in line or below expectations, and a small number outperformed.
“With the US Federal Reserve (Fed) expected to normalise interest rates in the second half of the year, we think funds will find opportunities in emerging markets like Asean,” says Areca Capital Sdn Bhd chief executive officer Danny Wong.
He adds with lower interest rates, corporate earnings on lower borrowing costs and better access to the capital market, may perform better. Higher consumer spending will also keep the economy growing.
“For Malaysia, besides earnings recovery, the low ringgit appeals to some foreign funds. “Moreover our market valuation is undemanding too,” Wong says.
For 2024, Bloomberg consensus for FBM KLCI earnings growth stands at 3.7% (see table).
However, Aminvestment Bank says this may not have fully taken into account analysts’ earnings revisions. The research firm has a more sanguine FBM KLCI core net profit growth estimate of 13.4% for 2024.
But this too lags behind Bloomberg’s estimates for neighbouring countries, where Vietnam takes the lead with earnings growth estimated at 43%, while Indonesia is projected to grow 33%.
For Thailand and the Philippines, it sees double-digit earnings growth at 14% and 18%, respectively.
Not unlike Malaysia, Bloomberg sees Singapore corporate earnings growing at a single digit of 5.8%.
It should be noted Indonesia, Thailand and Vietnam had posted negative earnings growth in 2023, according to Bloomberg data.
To be fair, the economies in the region are in different cycles. Malaysia and Singapore, for example, have more matured companies as compared to Vietnam.
Private investor and former investment banker Ian Yoong notes that the 4Q23 corporate results of regional bourses were collectively neutral to positive.
Across the region, airlines, tourism and gaming-related stocks have seen earnings picked up as countries emerged from Covid-19 disruptions that caused so much volatility and uncertainty.
Banks, as proxy to growth in Asean countries, posted resilient earnings and are poised to benefit with many multinational companies adopting the China+1 strategy to set up alternative production facilities within the region.
Yoong says some banks in the region provide attractive value propositions with their low price-to-book value and sustainably high yield.
However, they will continue to face pressure on net interest margin although more subdued, while asset quality is something to keep an eye on if the global economy slows more than anticipated.
Comparing regional markets, he says the FBM KLCI was the best performing market in February as compared to Indonesia, Singapore and Thailand – collectively known as MIST countries in the Asean region. The local equities market also outperformed its regional peers in January.
According to Yoong, the surge was due to strong foreign buying in the face of net selling by local institutional investors who sold Rm964mil of equities last month.
Retail investors, meanwhile, continued selling for the eighth successive month, spooked, perhaps, by the weakening ringgit.
“The positive news is that net selling by local retail investors tapered off sharply by about 40% in February and Malaysian stocks are likely set for a strong rebound,” he adds.
One economy to watch is Vietnam, which is moving towards being upgraded to an emerging status nation. The country’s stock market has seen a rally on the back of strong earnings growth of its banks and IT companies, while there were profit recoveries in steel and retail sectors.
Maybank Investment Bank (Maybank IB) Research in a report on Vietnam earlier this week, foresees its economy growing by 5.8% in 2024 with potential for growth surprising to the upside.
For context, Maybank IB estimates
Malaysia’s gross domestic product (GDP) to grow 4.4% in 2024 after it grew lower than estimates in the final quarter of 2023, bringing full-year growth to 3.7%.
As for Thailand, it expects GDP growth at 3.2%, while Singapore to come in at 2.2%.
While headwinds remain for the region, such as the ongoing geopolitical risk which could impact trade flows, the region could see portfolio capital reflows after the Fed rate cut, which is expected in mid-2024.
This could potentially benefit Indonesia, Malaysia, Thailand, and the Philippines, says UOB Kay Hian (UOBKH) Research in a March 4 research report.
According to it, the external balances of these four Asean countries have remained adequately resilient, which could likely spark a possible rate cutting cycle in to support their economic growth.
UOBKH Research says the probability is the highest for Thailand to be the first to cut rates given its downside growth risks in the coming quarters.
Meanwhile, Indonesia, Malaysia and the Philippines could afford to hold on a little longer before entering their respective rate cut streaks.
On Thursday, Malaysia’s central bank had kept the overnight policy rate (OPR) at 3%.
The country’s interest rates are currently lower than most neighbouring countries.
A steady OPR will help to narrow the negative gap with US interest rates and thus support the ringgit recovery in the second half of this year, says economists. They expect the OPR to remain at 3% throughout 2024.