Malaysia’s market to see recovery in earnings — Analysts
KUALA LUMPUR: Malaysia’s FBM KLCI earnings could see a recovery in the remaining half of the year due to steadier commodity prices, improvements in external demand and gradual recoveries in domestic consumption, analysts observed.
However, they noted that while a possible downward revision in consensus forecast could weigh on sentiments should expectations not be met in the coming quarters, there will still be growth nonetheless, a far cry from conditions in years past in which earnings went in the opposite direction.
Public Investment Bank Bhd’s research arm (PublicInvest Research) in its market strategy report, pointed out that the recent round of the first quarter of 2017 (1Q17) earnings reports were devoid of shockingly large impairment numbers symptomatic with previous quarters, which is a “much-welcomed sight”.
It noted that the gaming and media sectors were the only major disappointments in an otherwise steady quarter. Oil and gas, the serial underperformers in recent quarters saw relatively better performances this time round as the stabilisation in crude oil prices has had a somewhat “calming” effect on operations, it added.
It also pointed out that the consumer sector succumbed to cost pressures again however, as margins notably compressed.
The research team highlighted that earnings hits (above and/or in-line) are an even better 71 per cent to 29 per cent compared with 60 per cent to 40 per cent as at 4Q16 and 52 to 28 per cent as at 3Q16.
“Our FBM KLCI earnings growth assumptions for 2017 and 2018 are conservative at 4.2 and 5.5 per cent respectively, versus consensus expectations of between eight and 10 per cent.
“With steadier commodity prices, improvements in external demand and gradual recoveries in domestic consumption, we see scope for earnings upgrades on our end,” it opined.
It added, “While a possible downward revision in consensus forecast could weigh on sentiment should expectations not be met in the coming quarters given the relatively higher growth ascribed, we would still like to remind readers that there will still be growth nonetheless, a far cry from conditions in years past in which earnings went in the opposite direction.
“Again, this is a major theme we had been chiming on for our markets this year and next, earnings recovery.”
Meanwhile, on talks of Malaysia’s general elections, PublicInvest Research believed that if the General Election were to be held in November 2017, then the ‘election play’ could be over.
If the General Election were to be held in February next year (or any time after nine months from now, then there might still be a chance to catch in on the ‘election play’, it added.
“We would like to stress here that there is no fundamental element to this study, and that past movements may not necessarily suggest current or future ones. These charts are merely for observation and information purposes,” it pointed out.
Aside from that, on the performance of Malaysia’s ringgit in 2H17, PublicInvest Research believed that the ringgit is still undervalued.
It pointed out, “We still see the Ringgit headed toward the 4.10 to 4.15 levels in 2H17 stemming from further capital inflows owing to the strength in the domestic economic recovery, and less pronounced bond-related outflows as interest rate volatilities take a temporary backseat, amongst others.”
Based on the fact that the ringgit remains undervalued, the research team believed that net foreign flows into the equity market should remain positive for the remainder of the year.
“This would then result in an actual appreciation of the ringgit from fresh equity-related demand, which becomes a selffulfilling cycle,” it opined.
As for Malaysia’s trade performance, PublicInvest Research said, Malaysia could see a recovery in its trade performance, driven by steady demand for its electrical and electronic products.
“Recovery in trade. With exports as a [percentage point of GDP falling in recent years, economic growth has also been mixed somewhat, though we acknowledge there have been weaknesses to other sub-segments of the economy that have contributed to the declines.
“It is nonetheless encouraging to note that there has been a notable pickup in 1Q17, corresponding to a marked improvement in GDP growth. While still early days to call for a substantive turnaround, we are of the belief that major product items that Malaysia exports, in particular semiconductors and integrated circuits, should continue to see steady demand in the coming years on the back of greater technological proliferations,” it said.
Overall, PublicInvest Research believed that Malaysia’s investment case is still solid compared to its neighbouring countries.
“Regionally, Malaysia’s investment case is still sound even though we are slightly more expensive at 16.5-folds one-year forward earnings versus Thailand’s 15.9-folds and have dividend yields slightly lower at 3.1 per cent versus the latter’s 3.2 per cent, this is more than made up for by Malaysia’s GDP growth anticipated to come in between 4.6 to five per cent versus Thailand’s 3.2 per cent,” it explained.