MARKET DEVELOPMENT
Issues Affecting Malaysian Market Will Continue in 2016, But Better Prospects
Issues Affecting Malaysian Market Will Continue in 2016, But Better Prospects
28/12/2015 (The Star) - Issues affecting the Malaysian equities market this year will continue into 2016 but the prospects look better especially with political uncertainties subsiding, according to analysts.
The weaker ringgit, consumer sentiment and commodity prices would continue to weigh on the market and these factors would affect corporate earnings, they said.
Despite the headwinds, including an uncertain external environment, CIMB Investment Bank Bhd research head Terence Wong said much of the bad news had been priced in.
He expected the benchmark KLCI target to be raised to 1,900 from 1,850 by end-2016 based on a higher 16.5 times price-to-earnings ratio (from 15.5 times previously), citing the waning of political noise stemming from 1Malaysia Development Bhd as one of the reasons for 2016 to be a better year.
Foreign-selling should subside, as the foreigners’ shareholdings were at four-year lows. “We believe it is unlikely that foreign shareholding will fall to global financial crisis (GFC) lows of slightly above 20%, and that a rebound from current levels would be a boost to the market. Should foreign shareholding return to the post-GFC highs of above 25%, that would be equivalent to stock market purchases worth RM50bil,” Wong said.
Affin Hwang Asset Management Bhd portfolio manager Chow Kar Tzen expected earnings to be in single-digits in percentage terms at best compared with the flat to negative earnings this year.
He told StarBiz that Malaysian firms would be facing the double-whammy of declining sales and margin pressures from the weak ringgit.
On the domestic front, the weak consumer sentiment index, as revealed by the Malaysian Institute of Economic Research to have fallen to 70.2 for the third quarter, showed that private consumption would continue to face pressure.
However, MIDF Amanah Investment Bank Bhd equity research head Syed Muhammed Kifni anticipated improved earnings as commodity prices were bottoming out. Furthermore, the macroeconomic outlook remained healthy.
He estimated the forward year aggregate earnings growth of the index-linked stocks to hit 8.6%, from a contraction of 6.6% this year.
“Therefore, premised on the rooted behaviour whereby earnings and price are trending broadly hand-in-hand, we reiterate our 2016 FBM KLCI target at 1,800 points. The baseline target equates to price-to-earnings of 16.34 times,” Syed Kifni said.
Chow said the local equities market would be lacklustre from the fundamental and valuations perspectives but he took a neutral stance from the technical perspective.
The first-half of 2016 would also see investors looking for cues on further hikes in the US benchmark interest rate, which hovered between 0% and 0.25% for nearly a decade. The US Federal Reserve raised the benchmark federal funds rate by 25 basis points on Dec 17 – the first time since 2006.
“There are expectations of two to four rate hikes and anything beyond that will have a negative impact on the market. Anything that falls within the range will be factored in easily by the markets,” Chow added.
Aberdeen Islamic Asset Management Sdn Bhd chief executive officer Gerald Ambrose said Malaysian consumers were still wary and that demand had not bounced back despite the goods and services tax having been implemented since April.
He described consumer demand as a “half-hearted recovery” and that the worry would be whether it could recover next year.
Despite the downbeat outlook for consumer demand and in contrast to the general sentiment, Ambrose expected positive performance for the local bourse in 2016 on higher dividend yield.
“We are getting a dividend yield of 3.5% to 4% from the market, so if you assume prices remain unchanged then the index will be 3.5% to 4% higher than it did in the beginning of 2016,” he said.
Ambrose said local institutional investors would continue to support the market.
In fact, their participation had increased significantly given the foreign outflows this year.
Chow added that Malaysian institutional investors have the cash and that ValueCap Sdn Bhd, which would see RM20bil fund injection, would also be an additional source of funds for the local bourse.
The decision to reactivate ValueCap, formed in 2002 to support underperforming stocks, was announced in mid-September.
Ambrose has also taken a contrarian view to falling oil prices.
Brent, the global benchmark has fallen to the US$35-a-barrel level in recent weeks.
He said Malaysia had become more competitive because fuel subsidies had been abolished.
“The public is getting a dose of reality,” Ambrose pointed out.
Chow said any rise in geopolitical concerns in oil-producing regions would be in Malaysia’s favour.
Meanwhile, CIMB Investment Bank Bhd’s regional head of plantations and deputy head of Malaysia research Ivy Ng expected crude palm oil (CPO) prices to average around RM2,450 per tonne compared with an expected average of RM2,180 this year due to the impact of the El Nino weather pattern on oil-palm estates.
According to the Malaysia External Trade Development Corp, exports of palm oil products made up 5.2% or RM33.68bil of total Malaysian exports between January and October.
“Palm oil supply is expected to grow at a much slower rate in 2016, so that will move prices higher,” Ng said in an interview, adding that depending on the severity of the impact and ringgit weakness, CPO prices could hit RM2,700.
Another factor that could impact CPO prices would be if Indonesia raised the amount of biodiesel in fuels to 20% next year, from 15% this year.
On that note, Ng is cautiously optimistic, based on expectations of higher planters’ earnings.
The issues that could weigh on plantation earnings would be costs, as Malaysian planters would see costs rise between 3% and 5% in the second-half of 2016 on the higher minimal wage requirement, which comes into effect from July 1.
Her top picks included Genting Plantation Bhd, because of the company’s young-tree profile, as well as Singapore’s First Resources Ltd and Indonesia’s PT Astra Agro Lestari.
On another note, Kenanga Investment Bank Bhd equity research head Sarah Lim said Malaysia’s property market remained in the doldrums in view of the stringent lending measures.
She expected further decline in volume for property-market transactions.
“We are seeing a very sharp drop in numbers which we have not seen in the last 10 years,” Lim said.
On property stocks, she has a “neutral-to-negative” stance for next year as the stocks could see an impact on valuations if sales are not sustained.
“Moving forward, we’re going to see an era of declining sales volume and developers fighting for market share,” Lim said.
Her top pick is Hua Yang Bhd, with an outperform call and target price of RM2.20.
Lim said Eco World International Bhd, to be listed next year, should lure investors on newsflows.
For more defensive property stocks, she recommended UOA Development Bhd with an outperform call and target price of RM2.22.
“Having said that, I would advise investors wanting to look at property stocks to take a 12- to 18-month view on the sector,” Lim pointed out.
The weaker ringgit, consumer sentiment and commodity prices would continue to weigh on the market and these factors would affect corporate earnings, they said.
Despite the headwinds, including an uncertain external environment, CIMB Investment Bank Bhd research head Terence Wong said much of the bad news had been priced in.
He expected the benchmark KLCI target to be raised to 1,900 from 1,850 by end-2016 based on a higher 16.5 times price-to-earnings ratio (from 15.5 times previously), citing the waning of political noise stemming from 1Malaysia Development Bhd as one of the reasons for 2016 to be a better year.
Foreign-selling should subside, as the foreigners’ shareholdings were at four-year lows. “We believe it is unlikely that foreign shareholding will fall to global financial crisis (GFC) lows of slightly above 20%, and that a rebound from current levels would be a boost to the market. Should foreign shareholding return to the post-GFC highs of above 25%, that would be equivalent to stock market purchases worth RM50bil,” Wong said.
Affin Hwang Asset Management Bhd portfolio manager Chow Kar Tzen expected earnings to be in single-digits in percentage terms at best compared with the flat to negative earnings this year.
He told StarBiz that Malaysian firms would be facing the double-whammy of declining sales and margin pressures from the weak ringgit.
On the domestic front, the weak consumer sentiment index, as revealed by the Malaysian Institute of Economic Research to have fallen to 70.2 for the third quarter, showed that private consumption would continue to face pressure.
However, MIDF Amanah Investment Bank Bhd equity research head Syed Muhammed Kifni anticipated improved earnings as commodity prices were bottoming out. Furthermore, the macroeconomic outlook remained healthy.
He estimated the forward year aggregate earnings growth of the index-linked stocks to hit 8.6%, from a contraction of 6.6% this year.
“Therefore, premised on the rooted behaviour whereby earnings and price are trending broadly hand-in-hand, we reiterate our 2016 FBM KLCI target at 1,800 points. The baseline target equates to price-to-earnings of 16.34 times,” Syed Kifni said.
Chow said the local equities market would be lacklustre from the fundamental and valuations perspectives but he took a neutral stance from the technical perspective.
The first-half of 2016 would also see investors looking for cues on further hikes in the US benchmark interest rate, which hovered between 0% and 0.25% for nearly a decade. The US Federal Reserve raised the benchmark federal funds rate by 25 basis points on Dec 17 – the first time since 2006.
“There are expectations of two to four rate hikes and anything beyond that will have a negative impact on the market. Anything that falls within the range will be factored in easily by the markets,” Chow added.
Aberdeen Islamic Asset Management Sdn Bhd chief executive officer Gerald Ambrose said Malaysian consumers were still wary and that demand had not bounced back despite the goods and services tax having been implemented since April.
He described consumer demand as a “half-hearted recovery” and that the worry would be whether it could recover next year.
Despite the downbeat outlook for consumer demand and in contrast to the general sentiment, Ambrose expected positive performance for the local bourse in 2016 on higher dividend yield.
“We are getting a dividend yield of 3.5% to 4% from the market, so if you assume prices remain unchanged then the index will be 3.5% to 4% higher than it did in the beginning of 2016,” he said.
Ambrose said local institutional investors would continue to support the market.
In fact, their participation had increased significantly given the foreign outflows this year.
Chow added that Malaysian institutional investors have the cash and that ValueCap Sdn Bhd, which would see RM20bil fund injection, would also be an additional source of funds for the local bourse.
The decision to reactivate ValueCap, formed in 2002 to support underperforming stocks, was announced in mid-September.
Ambrose has also taken a contrarian view to falling oil prices.
Brent, the global benchmark has fallen to the US$35-a-barrel level in recent weeks.
He said Malaysia had become more competitive because fuel subsidies had been abolished.
“The public is getting a dose of reality,” Ambrose pointed out.
Chow said any rise in geopolitical concerns in oil-producing regions would be in Malaysia’s favour.
Meanwhile, CIMB Investment Bank Bhd’s regional head of plantations and deputy head of Malaysia research Ivy Ng expected crude palm oil (CPO) prices to average around RM2,450 per tonne compared with an expected average of RM2,180 this year due to the impact of the El Nino weather pattern on oil-palm estates.
According to the Malaysia External Trade Development Corp, exports of palm oil products made up 5.2% or RM33.68bil of total Malaysian exports between January and October.
“Palm oil supply is expected to grow at a much slower rate in 2016, so that will move prices higher,” Ng said in an interview, adding that depending on the severity of the impact and ringgit weakness, CPO prices could hit RM2,700.
Another factor that could impact CPO prices would be if Indonesia raised the amount of biodiesel in fuels to 20% next year, from 15% this year.
On that note, Ng is cautiously optimistic, based on expectations of higher planters’ earnings.
The issues that could weigh on plantation earnings would be costs, as Malaysian planters would see costs rise between 3% and 5% in the second-half of 2016 on the higher minimal wage requirement, which comes into effect from July 1.
Her top picks included Genting Plantation Bhd, because of the company’s young-tree profile, as well as Singapore’s First Resources Ltd and Indonesia’s PT Astra Agro Lestari.
On another note, Kenanga Investment Bank Bhd equity research head Sarah Lim said Malaysia’s property market remained in the doldrums in view of the stringent lending measures.
She expected further decline in volume for property-market transactions.
“We are seeing a very sharp drop in numbers which we have not seen in the last 10 years,” Lim said.
On property stocks, she has a “neutral-to-negative” stance for next year as the stocks could see an impact on valuations if sales are not sustained.
“Moving forward, we’re going to see an era of declining sales volume and developers fighting for market share,” Lim said.
Her top pick is Hua Yang Bhd, with an outperform call and target price of RM2.20.
Lim said Eco World International Bhd, to be listed next year, should lure investors on newsflows.
For more defensive property stocks, she recommended UOA Development Bhd with an outperform call and target price of RM2.22.
“Having said that, I would advise investors wanting to look at property stocks to take a 12- to 18-month view on the sector,” Lim pointed out.