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Saturday, 24 June 2017

(The Star) Market expectations in the second half

Pundits have mixed opinions on how the trend will continue from the first half


The benchmark index FBM KLCI has had a big run this year, after three years of listless trading.

Last week, when the US Federal Reserve (Fed) raised its rates for the fourth time to 1%-1.25%, the market didn’t budge simply because it had already priced in Fed-related events.

In other words, investors don’t like uncertainty. They heave a sigh of relief once it’s over and move on.

Last year was a tough one for Malaysia aside from the lacklustre stock market, as it was also bogged down by the weaker ringgit and low oil prices.


Muh Rong: ‘We anticipate the second half to be more challenging.



So, has the FBM KLCI reached its peak and is it due for a correction?

A rally doesn’t necessarily end just because the market has reached a certain peak. The market may fall because of euphoric participants. The valuations may be too high then.

Another key factor for falling stock prices recently is the weakness in the commodities market.

The current situation is different from the supply glut faced in 2014.

For now, it is the US shale players who are flooding the market. Despite the Organisation of the Petroleum Exporting Countries’ (Opec) efforts to curb production with quota cuts, the present sentiment is that there is just too much oil out there.

Investors aren’t convinced with how Opec will manage the oversupply in the market, and thus the oil prices entering a bear market earlier in the week.

In the last four weeks, Brent oil has declined by almost 17.6% to US$44.82 a barrel.

Is this current lull in the FBM KLCI an opportunity to buy?

If so, what should investors actually buy? What does the second half of 2017 hold for the local stock market?

Market participants have mixed expectations. Some reckon that there isn’t much upside in the market from current levels and suggest that investors look at defensive sectors that promise steady dividend yields.

Others feel the election momentum and better results will continue to propel the FBM KLCI upward.

“We do not foresee significant upward momentum in the second half, be more defensive,” says UOB Kay Hian head of research Vincent Khoo. “Focus on the defensive stocks, high yielders, laggards and compelling thematic investments.”

His top picks include companies operating in the power and construction sectors.


: ‘Investors should accumulate stocks that had underperformed the market



For the technology sector, he reckons that it is going through a consolidation period and a rebound is expected in the fourth quarter.

“We are more cautious on the plantation sector, and have turned more neutral on the banking and gaming sectors, which have significantly outperformed the market in the first half,” says Khoo.

Danny Wong, CEO of Areca Capital Bhd, feels differently though.

“I foresee the FBM KLCI continuing its uptrend in the second half after some minor consolidation. Ultimately, whether the uptrend is sustainable will depend on its earnings. We have had some good news. For example, our export numbers are strong. We have some RM10bil of foreign money year-to-date, and we’ve also had some reversal of outflows on the Malaysian Government Securities side,” he says.

He notes that valuations are catching up, with the FBM KLCI now trading at some 16.5 times the 2017 earnings.

“So, it’s important that the earnings are delivered. Fundamentally, the earnings for the component stocks are there and coming from a low base. Our first-quarter gross domestic product growth of 5.6% also encouraged foreigners,”

He adds that on the sentiment side, risk appetite is also improving. Anticipation of a pre-election rally is also helping keep stocks buoyant.

CIMB Investment Bank’s head of equity research Ivy Ng also suggests that defensive stocks will be the theme in the second half.

Among the research house’s favourite sectors are construction and utilities, as well as small-capitalisation companies.

“We are more cautious going into the second half, following the strong performance in the early part of the year. We advise investors to take profit on cyclical stocks and switch to more defensive sectors into the second half,” she says.

She points out that among the events that could derail the market for this year are slower-than-expected corporate earnings growth, a sharp drop in commodity prices and the market pricing in Fed rate hikes in 2018.

Ng targets the FBM KLCI to end the year at 1,790 points, which is only 14 points away. Khoo, meanwhile, expects the local stock market to end lower at 1,770 points.

“We maintain our view for the market to peak at around 1,800 and consolidate thereafter,” Khoo says.

Rakuten Trade Research head Kenny Yee on his part expects a weak ringgit to be the major factor in pushing the stock market higher in the second half of the year.

He forecasts the FBM KLCI to end the year at 1,850 points on a price earnings ratio of 16.5 times, and may even overshoot the 1,900-point level.

“Investors should take advantage of the current lull and accumulate stocks that had underperformed the market over the last two months.

“For those tracking the FBM KLCI, we would advocate investors to look at the top-20 constituents in terms of market capitalisation,” Yee says.

Taking a break

The market could be primed for a pause after rising more than 150 points since the beginning of the year, driven by the acceleration in the foreign purchase of local stocks.

Year-to-date, the Malaysian stock market has given out one of the best returns among Asean stock markets at 9.1%, second only to the Philippines.

Although foreign investors remain net buyers on Bursa Malaysia, the buying has eased.

According to MIDF Research, after 18 weeks of purchases, foreign investors sold RM99.6mil net of Malaysian stocks last week.

Nonetheless, foreign investors have maintained their net buyer position on Bursa Malaysia with more than RM10bil net, higher compared with other countries in South-East Asia, namely, Thailand, Indonesia and the Philippines.

In 2015, the net foreign outflow from the Malaysian equities market was RM19.5bil, while last year it was RM3bil.

Astramina Advisory Sdn Bhd managing director Wong Muh Rong concurs that the local stock market has done well in the first half of the year despite uncertain world politics.

“We anticipate the second half to be more challenging,” she says, adding that deal flows are showing signs of slowing down.

She points out that deal execution will be the theme in the second half.

Construction, infrastructure, property developers, and oil and gas (O&G) are among her top picks for the second half of the year.

“Reason being that Malaysia is due for elections in May 2018, and that would see the government dishing out big construction projects prior to that,” says Wong.

On the property sector, she reckons that there could be consolidation within the sector that leads to potential merger and acquisition exercises.

She adds that there will also be “major consolidation” in the O&G sector because of continuous weak oil prices and shorter contract tenures awarded.

“We foresee some major consolidations among the smaller players, likely a lot of this will occur next year.




hoo: ‘We do not foresee significant upward momentum in the second half.’



“The market needs some time to let the cleansing process begin. The weaker O&G companies will be flushed via restructuring or haircut exercises. All this will entice suitable buyers. It is a buyer’s market now,” she says.

Corporate earnings support

In the first half of the year, the rally in the stock market was supported by corporate earnings and a robust economic outlook.

The economy rebounded strongly by 5.6% in the first quarter ended March 31, compared with the same quarter a year ago, fuelled by private sector-led investments, consumption and exports.

When compared with the last quarter of 2016, the economy grew by 1.8%.

Bank Negara’s projections is for the economy to grow between 4.3% and 4.8% this year.

Corporate earnings in the first quarter saw its fastest growth in two years. The banking and export-related sectors were boosted by the stronger economic growth.

A possibility of an election has also resulted in the higher buying interest in Malaysian stocks.

Areca’s Danny says that the uptrend momentum of the FBM KLCI will depend on the corporate earnings performance.

Danny says under-delivery of earnings could hurt the market.

Sectors to look at are banks, export-oriented and electrical and electronics, he adds.

Interestingly, he also suggests the O&G sector due to the many impairments made in previous years.




hoo: ‘We do not foresee significant upward momentum in the second half.’



“There could be a turnaround story. Earnings of some of the companies may improve on the back of impairment reversals,” says Danny.

On potential setbacks that could derail the market, Danny says to keep an eye on US President Donald Trump’s policies.

“Some of his policies are rather far out, an actual implementation of his policies could cause some shocks to the market,” he says.

The other thing to watch out for would be the Fed on further rate hikes that could cause some money outflows in this part of the world.

Rakuten’s Yee says that sectors that have done well in the first half of the year such as banks, construction, and plantations will continue their performance in the second part of the year.

“For the banks, the consensus is expecting a solid growth of between 9% and 11% this year after a disappointing 2016,” he says.

Yee suggests that investors monitor the US market, as he believes that it is overvalued and that further interest rate hikes there could lead to a knee-jerk reaction in the global market.

“Nonetheless, we are positive that Asia will overcome this temporary turmoil, as global funds will turn to Asia as their investment destination thereafter,” Yee says.

MIDF Amanah Investment director of corporate investment banking Sherilyn Foong says that expansive plays including infrastructure and construction should continue to do well, coupled with the anticipated strong foreign direct investment inflows from China.

“This should fuel the market going forward into election mode, which has traditionally been exciting and outperforming generally. Exciting niche plays include interesting new listings in the small mid-cap space, as well as restructuring stories. We should watch out for the debut of the SME LEAP bourse too,” she says.