THE recently ended fourth quarter of 2021 (Q4’21) earnings season was indeed a decent quarter, led by a strong performance among some of Malaysia’s largest companies, especially in the resource-based sector, on the back of firm commodity prices, as well as from the banking sector.
Notable surprises were also seen among selected property-based companies in the Q4 period as the Home Ownership Campaign came to an end on Dec 31, 2021.
On the flip side, some technology-based companies fell short of expectations, while glovemakers saw sharp declines in net earnings as the average selling price of their products fell to the levels last seen before the pandemic.
Q4 nominal GDP expanded
Economically, the Malaysian economy rebounded in the Q4 period, as the economy expanded by 6.6% quarter-on-quarter (q-o-q) and 3.6% year-on-year (y-o-y), reversing the short technical recession when the economy contracted by 3.6% q-o-q in the preceding quarter.
With the growth in the Q4 period, the Malaysian economy expanded by 3.1% for the year 2021, reversing the deep dive of 5.6% in 2020.
The key factor that helped the economy to recover in the Q4 quarter was the impact from the fully-opened economy as vaccine milestones were achieved, the number of cases was brought down, and the healthcare system was able to cope with the active Covid-19 cases.
In nominal terms, the economy expanded by 12.1% y-o-y to reach RM424.3bil, thus enabling the overall economy to grow by 9% y-o-y or RM127.6bil in nominal terms to reach RM1,544.2bil in 2021.
Interestingly, based on the 2021 real gross domestic product (GDP) data, the economy is not back to the pre-pandemic level as it is at 97.3% of the size of the economy in 2019.
However, the GDP data based on nominal value shows a different picture. The economy can be said to be back on its’ feet, as the Malaysian economy finished the year 2.1% larger than the size of the economy in 2019, which stood at RM1,513.2bil then.
With the Q4’21 GDP data coming in above market forecast, the Q4 earnings momentum too was much stronger if one were to exclude the significant decline in glove companies’ earnings.
Excluding the glove companies, on a q-o-q basis, the Q4’21 earnings rose by close to 7%, while on a y-o-y basis, the earnings momentum jumped close to 36%, almost three times the pace of nominal GDP growth in the quarter.
The relatively stronger earnings momentum enabled the ratio of companies’ earnings that surprised the market against those that were below expectations to improve considerably, as some 34% of companies reported earnings that were above expectations against 25% that were below.
This was almost a complete reversal of the preceding quarter when 25% of companies reported results that were above expectations and 33% that were below expectations. Hence, the earnings disappointment ratio fell to just 0.75 times, which is a vast improvement from the preceding quarter’s 1.29 times print.
The q-o-q trend is not unexpected as the Q4 period gives market analysts a better grip on what to expect for the full year and hence the results naturally showed much stronger hits than misses.
2022 earnings upgraded
Post-Q4 report card, there have been minor adjustments to earnings estimates for the year with a notable increase in earnings forecast for commodity-based companies as well as the banking sector, taking into consideration the improved business sentiment which will likely see better loan growth as well as potential rate hike of between 25-50 basis points (bps) in the second half of this year, which may see the banks enjoying better net interest margin.
For this year, from the earlier forecast earnings contraction of 4.3% at the end of the Q3’21 quarterly reporting period, the revised estimate now shows a smaller contraction of 1.5% y-o-y, which is a 2.8 percentage points (pps) improvement.
Earnings contraction is envisaged this year among companies that will be reporting chargeable income above RM100mil due to the imposition of the one-off prosperity tax.
As earnings for 2023 too is now relevant to market valuations, brokers now estimate stocks under their coverage to see a 10.5% earnings improvement next year from the earlier estimate of a 10.8% jump before the Q4 reporting season.
Index-wise, market estimates too have increased with the current consensus looking at a FBM KLCI fair value of 1,651 points for this year, 10 points or just 0.6% higher than the previous estimate of 1,641 points as three brokers raised their index fair value by between 10 and 51 points, while the rest left their estimates unchanged.
Overall, brokers have a fair value range of between 1,600 and 1,710 points.
Based on Thursday’s close of 1,618.54, the overall index upside is seen limited but there is nothing to stop brokers from raising their target index values should the FBM KLCI surpass the 1,650-point level, as most will be willing to value the market at an expanded price-earnings multiple or based on a further upgrade in earnings, especially if the commodity super-cycle momentum is extended deeper into 2022.
Presently, the market is valued on average at a price-earnings multiple of just 15.4 times this year’s earnings.
A re-rating to just 16.5 times price-earnings multiple could take market fair values closer to 1,800 points.
Externalities dictate the market direction
The Russian invasion of Ukraine and the response taken by the United States as well as its allies shows that there are ways to deal with a leader that decides to take matters into his own hands and the rest of the world (well, almost all) will come together to punish the nation.
The move by the US and its allies to cripple Russia financially by imposing sanctions and limiting the usage of Swift services as well banning US citizens and companies from doing business with the Bank of Russia, the Russian National Wealth Fund, and the Ministry of Finance are masterstroke moves to cripple the Russians without firing a single shot.
Even rating agencies and benchmark global equity index providers too have joined in to isolate Russia from the rest of the world, as both Moody’s and Fitch downgraded Russia to junk status while FTSE Russell and MSCI have now removed Russia from key benchmark indexes.
As we are just into the third month of the year, amid the volatility of global markets on the back of worries of US rate hikes as well as the current ongoing geopolitical risk, the local bourse seems to be in a sweet spot benefitting from adversities of global markets with significant price gains seen among commodity-based companies as well as the banking sector.
The technology sector, which had a relatively good run for the past couple of years, meanwhile, has finally seen some profit-taking activities, mirroring the performance of tech stocks listed in the US.
Riding on net foreign buying
A check on the FBM KLCI’s performance shows that the local market has come out of its slumber and is up by 3.3% year-to-date, riding on the positive momentum built-up from large foreign inflows, which has reached almost RM3.62bil as buying interest among commodity-based companies remained strong.
February’s foreign net inflows had already shown that foreign investors have been raising their bets on the local bourse as some RM2.84bil net inflows were recorded – the highest monthly net inflow in more than four years.
If the momentum continues, we will likely see the Malaysian market experiencing one of the best years in terms of portfolio inflows and that may take the FBM KLCI to beat all estimates for 2022.
For the record, since 2014, the strongest net foreign buying was in 2017 whereby foreign net buying surged to RM10bil, and in that year, the FBM KLCI advanced 9.5% to close at just under 1,800 points. Will history repeat itself?
Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.