Bias seen for Bursa’s benchmark index

> FBM KLCI neither too cheap nor too expensive compared with regional peers: MIDF Research

PETALING JAYA: MIDF Research foresees an upward bias in the trajectory of FBM KLCI going forward, amid the everpresent market “noises”, based on Bloomberg consensus that FBM KLCI earnings will grow by 5.2% and 5.9% yearon-year in 2017 and 2018 respectively.

“As at the close of week ended June 16, the price-to-earnings ratio (PER) of FBM KLCI stood at 16.8 times based on current year earnings. With a standard deviation (SD) to the PER of 0.93, the valuation of FBM KLCI is neither too cheap nor too expensive in comparison with its main regional peers,” it said in its strategy report last Friday.

Against other international markets, the FBM KLCI is trading at a nominally lower SD to the PER valuation, making FBM KLCI valuation cheaper vis-a-vis international markets. However, note that these international markets are at different phases of the economic cycle.

According to MIDF Research, the SD to the PER of FBM KLCI began to gravitate towards +1SD (amid intermittent pullbacks) pursuant to Brexit in June last year, due to expectation of further monetary accommodation by the world’s major economies.

It said the momentum of foreign funds into regional markets and Malaysian equity in particular, remained strong in the second quarter amid Wall Street experiencing a series of record highs.

As a result, foreigners were arguably prompted to diversify away from the US market as their risk appetite got higher.

“It is notable that more than 30% of the total net outflows from Malaysian equity in the last three years have been reversed by the cumulative year-to-date inflow of more than RM10 billion,” it added.

It said that market sentiment in the shorter term may be influenced by external geopolitical uncertainties such as the possibility of a flare-up in the feuds between several Arab nations against Qatar as well as political uncertainty in the UK pursuant to the rather “indecisive” June election.

In Malaysia, while parliament will be automatically dissolved only in June next year, there is talk that the 14th general election could be held as early as the third quarter of 2017.

MIDF Research said that if the 14th general election were to be held in the third quarter this year and the nation’s leadership remains with the incumbent, another postelection rally can be expected.

Despite the ever-present “noises” from short-term price volatility due to market sentiment and other situational issues, observations of the trend between earnings and price are conclusive with regard to the nature of their secular direct relationship.

“Hence, in the longer term, our assessment on the likely trend path of the FBM KLCI is highly dependent on its expected earnings growth performance during the coming periods,” it added.

MIDF Research said the outlook for Malaysia’s economy remains sanguine with its in-house gross domestic product (GDP) growth estimate for the year being revised upwards to 5.1% from 4.9% earlier, supported by robust external performance and resilient domestic demand.

It foresees a restricted downside to the equity market but it remains mindful of intermittent cyclical pullbacks that may take place as a result of transient situational issues.

“As per the (Bloomberg consensus) FBM KLCI 2017 estimate of 106.6 points, the earnings integer is expected to increase further, albeit by merely 1.3 points (from the 105.3 points level post first quarter 2017 results) during the remainder of this year.

“We can thus imply that the market is expecting the pace of earnings recovery to taper off rather drastically in the quarters to come, a view which may be at odds with the expectation of still upbeat macro performance going forward (higher GDP growth target of 5.1% this year). Hence we believe there is a better than even chance for the prevailing 2017 earnings estimate to be tweaked upwards in the coming quarters,” it said.

It reiterated its year-end 2017 FBM KLCI baseline target of 1,830 points. It said that the baseline target valuations may decline going forward, in view of the potential upward revisions in earnings. It also rejigged its lower target range to 1,770 points from 1,730 points, while its upper target range is unchanged at 1,890 points.

The FBM KLCI closed at 1,779.45 on Friday.