Nomura cautious on Malaysian stocks
KUALA LUMPUR: Nomura, which has set an end-2018 target of 1,830 points for the FBM KLCI, remains neutral on Malaysia’s stock market, citing macro risks and regime change possibly weighing on Bursa Malaysia’s performance this year.
The research house previously cut its FBM KLCI target from 1,920 points, due to possible key policy changes by the government and the ongoing USChina trade actions.
Nevertheless, its head of Malaysia equity research Tushar Mohata said at a media briefing last Friday that potential upside would be premised upon the government’s fast progression with its agenda, domestic investor base support that appears reasonably strong, as well as rising current account surplus due to the strong export numbers.
He said stronger consumer confidence due to goods and services tax (GST) removal and associated perception of disinflation is also likely to benefit sectors including banking, consumer, healthcare as well as transport.
“However, other sectors such as utilities, plantations and telcos are still not able to show a turnaround in earnings and these sectors might be dragging the stock market index down,” Tushar said.
He expects business sentiment to remain volatile as businesses are uncertain of likely policy changes by the government and their impact on them.
In particular, Tushar singled out potential increase in cost of doing business if the government takes a stricter approach on foreign workers.
“Coupled with Pakatan Harapan’s manifesto promise of raising minimum wage and standardising minimum wage across Peninsular and East Malaysia, businesses are likely to suffer from wage inflation and margin compression.”
Nonetheless, Tushar pointed that the government’s attempt to look for higher revenues and lower spending to cover up for the revenue shortfall from the GST and reduce the country’s debt could potentially pose an upside risk to government-linked companies’ (GLCs) dividends.
“In the past three years, cash holdings of KLCI members have been rising and gearing has been decreasing, meaning that decreasing consensus implied dividend payouts seem too bearish to us,” he said.
GLCs make up the majority of the 30 constituents of the FBM KLCI.
On the outflow of foreign funds, Tushar reiterated that it is actually happening across Asean and it has largely matched previous years’ trends.
“That is why now we are seeing a degree of stabilisation in the equity markets, where outflows are also slowing down,” he said, noting that the foreign funds trend going forward will be very much dependant on US Treasury yields.
Tushar said given that Malaysia is among the potential beneficiaries of the US-China trade war, it could possibly see the return of some of the outflows.
Nomura’s sector picks for 2018 are gaming, hotels and leisure, consumer, oil and gas, financials as well as healthcare.
Tushar cautioned investors to be wary of sectors with regulatory risks that might change in favour of consumers. Malaysia Airports Holdings, Malayan Banking, Petronas Chemicals, IHH Healthcare and Muhibbah Engineering are his top picks.