Slow growth ahead for Malaysia’s market but economic fundamentals remain strong
KUCHING: Given headwinds from US interest rate hike, Brexit and 1MDB, coupled with uninspiring growth prospects, analysts observed that Malaysia’s stock market will likely see slow growth ahead.
However, the country’s economic fundamentals remain strong, and as such, analysts expect economic growth to pick up in the second half of 2016 (2H16).
In a report, the AllianceDBS Research Sdn Bhd (AllianceDBS Research) highlighted that the FBM KLCI lost 2.8 per cent in May amid heavy foreign selldown.
“While exogenous factors such as expectations of imminent US interest rate hike and Brexit played a part in the selldown, a disappointing the first quarter of 2016 (1Q16) earnings season (34 per cent negative surprises among our coverage universe) and negative 1MDB developments further dampened market sentiment,” it said.
It opined that weak corporate earnings prospect would remain the Achilles heel of Malaysian equities.
“Heavyweight sectors such as telco and plantation continued to face earnings risk from intense
competition and poor fresh fruit bunches (FFB) yield respectively. While the banking sector has by and large held up in the 1Q16 earningsseason,selectivecorporate account exposure still led to asset quality concerns in May and weak underlying trends seen in AMMB, though unlikely to point towards systemic risks for the sector.
“Loan growth has moderated as anticipated, given the more subdued retail and corporate sentiment. On a brighter note, net interest margin ( NIM) has stabilised as banks largely priced up retail loans while deposit competition has subsided.
For other sectors, it said it retained its ‘overweight’ rating on construction and utilities sectors while an ‘ underweight’ rating was given to the auto and telco sectors given the earnings risk.
“Given headwinds from US interest rate hike, Brexit and 1MDB, coupled with uninspiring growth prospects, we continue to advocate a defensive equity strategy going forward. We prefer exposure to stocks with low beta, strong earnings resilience and/or good dividend yields,” it opined.
On the other had, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital) in a separate report, pointed out that Malaysia has been lumped into the same generic emerging markets basket.
“In reality, Malaysia faces little risks associated with a funds- rate hike. In addition, tepid global growth and weak domestic sentiment are weighing on gross domest ic product ( GDP) growth, but private consumption has been resilient despite this.
“We expect economic growth to pick up in 2H16 and fuel better corporate earnings, which have been lacklustre.
“Economic fundamentals remain strong, and we look for a gradual appreciation of the ringgit; hence, we believe the recent sell- down on specific domestic issues presents another buying opportunity,” it opined.
It noted that while economic activity slowed to 4.2 per cent year- on-year ( y- o-y) growth in 1Q16 on drags from the external environment and weak business sentiment, private consumption growth rose to 5.3 per cent (from 4.9 per cent in 4Q15) despite weak consumer sentiment.
“We expect overall GDP growth of 4.5 per cent in 2016E. Other economic expectations include inflation of 2.5 to three per cent, a current account surplus of two per cent of gross national income (GNI) and a 3.1 per cent fiscal deficit.”