The Malaysian Reserve (06/01/2020) - MALAYSIAN equities are set for a better year in 2020 with the resumption of earnings growth after a two-year hiatus thanks to subsiding external risks and a recovery in commodity prices.

Kenanga Investment Bank Bhd head of research Koh Huat Soon stated that the revival of mega infrastructure projects and the positive impact of trade diversion on investments and exports will further propel the local equity higher.

“Our end-2020 bottom-up target level for the FTSE Bursa Malaysia KLCI (FBM KLCI) is 1,712, which happens to coincide with our topdown target derived by applying at 15.9 times price-earnings multiple on 2021 earnings per share (EPS),” he said in a recent strategy report.

He stated that 2020 represents a mid-term of sorts for the Pakatan Harapan government since assuming power in May 2018.

He added that with two years at the helm closing in and little to show, the delivery agenda is becoming increasingly urgent. Where the ruling coalition has had some success, it has been mostly to do with reforms at institutional and government-linked companies, and it seems to stop there.

“We expect to see other revived projects, but slow in execution to pick up pace in 2020,” Koh added.

iFAST Capital Sdn Bhd believes the Asian region is about to witness a major turnaround (which likely extends into a rally) in 2020, fuelled by a series of catalysts like the semiconductor cyclical upswing, the US-China “Phase 1” trade deal and reduced political uncertainties, redirection of new orders into Asian economies and swing to positive investor sentiments.

“Asia and emerging markets’ (EMs) economic momentum are expected to swing positively in 2020. We expect a jumpstart in the region-wide export recovery to pass on positive effects to other cyclical sectors.

“A near-term shift in investor’s sentiments towards optimism (after broad pessimism across 2019) for EM and Asian equity markets in the year ahead could direct fund flows into these markets and help drive equity markets higher,” it said in its 2020 outlook.

Koh said the local benchmark FBM KLCI was trading too expensive in 2019 relative to the EPS that was achievable. The optimistic outlook was perhaps not surprising as early in the year, crude palm oil (CPO) was trading in the range of RM2,000-RM2,200 per tonne and several mega infrastructure projects were announced to be revived, with few expected Overnight Policy Rate (OPR) cuts.

“Towards the second quarter (2Q), it became clear that CPO was heading below RM2,000 (bottoming at RM1,800+ in July), those revived infrastructure projects were going to face execution delays (for instance, the change in Light Rail Transit Line 3’s (LRT3) project model from project delivery partner (PDP) to “fixed cost project” has led to delays due to renegotiations of previously awarded jobs, not to mention East Cost Rail Link, Rapid Transit System and Mass Rapid Transit Line 3 having their own unique problems) and banks’ net interest margins had to be cut, with OPR cuts looking likely on heightened external risks and the US Federal Reserve (Fed) reversing into an easing mode,” he said.

This led to earnings expectations downgraded twice due to disappointing 1Q and 2Q results.

“Consensus yearly earnings expectations were downgraded for every quarter after each reporting season since end-2017, before finally bottoming in the 2Q19 after which EPS expectations started to rise sequentially.

“This turnaround was driven mainly by recovery in the plantation sector, continued growth momentum of the oil and gas sector, and stable banks’ earnings,” he added.

Notably, the US-China trade war and the impact on the US and global economy were major bugbears in 2019.

Koh said the trade issue have contributed to an extended expansionary growth phase by putting on the brakes that enabled a more measured expansion, which spared the Fed of the need to hike interest rates.

The trade uncertainties caused pockets of weakness in manufacturing and agriculture, causing the Fed to refrain from continuing to hike rates in early 2019.

Rates were cut thrice as insurance against the risk of a severe downturn, but later held steady as the labour market demonstrated a healthy resilience.

“This is a perfect setting for funds to continue to flow into EMs. We have the right conditions for continued EM outperformance — firstly, a risk-on environment; secondly, the Fed funds rate that is likely to be on hold; thirdly, the US economy in an extended growth phase; and finally, a China economy that looks to be coming off a low base,” Koh said.

With the US presidential election to be held at the end of 2020, Koh said chances are politicians will be motivated to adopt pro-market and pro-business policies throughout the year.

The underperformance of the FBM KLCI against global indices for the past many years has led to its attractive relative valuations. The market has underperformed MSCI EM and MSCI Asia ex-Japan for five of the last six years.

“Since 2013, there has been just one year out of seven in which Malaysia had net inflow of foreign funds,” he said.

The benchmark FBM KLCI hit its 2019 high of 1,730.68 in February last year, before plummeting to below the critical 1,600 level in May as investors dumped shares due to heightened trade tensions.

It recovered fairly quickly, hovering around the 1,650-1,690 range throughout the middle of the year, before falling again to below 1,600 in August and sinking to its lowest for the year at 1,551.23 in October.

Since then, the gauge has struggled to stay afloat, although it closed 8.88 points higher at 1,611.38 last Friday.

Even if foreign fund managers continue to under weigh Malaysia out of misgivings about sluggish reform measures, succession issues and discord within the ruling coalition, Kenanga’s Koh believes Malaysia would still be able to deliver positive absolute returns in the event of fund inflows into EM as “all boats rise with a rising tide”.

According to MIDF Research, 2019 is set to be another year of foreign net outflow for Malaysia with the year-to-date foreign net outflow as of end2019 standing at about RM11 billion, lower than 2018’s total foreign net outflow of RM11.69 billion.

Read more at https://themalaysianreserve.com/2020/01/06/optimistic-outlook-to-fuel-recovery-in-2020/