THE Malaysian stock market may be lagging behind its peers now. But this could also mean that there is an opportunity for local equities to play catch up towards the end of this year and into 2022.
As it stands, most analysts remain optimistic that Bursa Malaysia could recoup its losses in the final three months of 2021, although they concede that the recovery path will be wrought with volatility.
One fund manager notes the current weakness of the local bourse offers an opportunity to accumulate fundamentally sound stocks in order to ride on the eventual upturn in activities.
“Although there is a lack of strong catalysts, our conviction is that the local stock market is poised for a recovery in the fourth quarter of 2021 and into 2022 in tandem with the reopening of the country’s economy,” he tells StarBizWeek.
“We see the current weakness as an opportune time to position ourselves to gain from the eventual uptick,” he explains.
For the nine months to September 2021, the FBM KLCI was among the three stock indices in Asia that were in the red, while others in the region remained in the positive territory.
At the close of 1,537.8 points, the local benchmark index registered a year-to-date loss of about 5.5% as at end-September 2021 – the second biggest loser in Asia behind Hong Kong’s Hang Seng, which posted a 9.8% year-to-date decline.
By sector in the local bourse, the outperformers year-to-date were led by technology; and transportation and logistics. The underperformers, on the other hand, were led by healthcare (in particular, glovemakers); energy; plantation; construction and utilities.
Wide-ranging targets
Despite the expected recovery, the FBM KLCI had a weak start to the fourth quarter of the year. It declined 13.32 points, or 0.87%, to close at 1,524.48 yesterday amid downward pressure on global markets.
This stemmed from ongoing anxieties over interest rates in major developed economies and the impact of regulatory changes in China.
Nevertheless, with the gradual reopening of Malaysia’s economy expected to improve investor sentiment, the local bourse could soon stage a rebound. This confidence is also backed by expectations that corporate earnings will continue to strengthen in the coming quarters, according to analysts.
In addition, the continued inflow of foreign funds into the local equity market would support its recovery, they note.
The estimates on how high the FBM KLCI go by end-2021 are wide ranging.
Among the more cautious are PublicInvest Research and Kenanga Research, which expect the FBM KLCI to close at 1,590 and 1,611 points, respectively, by end-2021.
Both estimates imply annual losses of 2.3% and 1% from the FBM KLCI closing of 1,627.21 as at end-December 2020.
The outlook by UOB Kay Hian (UOBKH) and AmInvestment Bank Research put the FBM KLCI in a slightly better position, with end-2021 targets of 1,635 and 1,643 points, respectively, while MIDF Research is the most optimistic of all, pegging its end-2021 FBM KLCI target at 1,700 points.
Value and cyclicals
PublicInvest Research expects Bursa Malaysia to remain a trading-oriented one for now. Nevertheless, it reckons the return of foreign investors in recent weeks could suggest that regional investor flow is picking up in momentum as the country’s growth prospects continue to strengthen.
“Our stock suggestions are a mix of cyclical names to capture upsides from eventual economic re-opening and business normalcy, and stocks likely to see multi-year growth stories,” PublicInvest Research says.
It is “overweight” on the consumer, gaming, manufacturing, oil and gas, property and technology sectors.
Kenanga Research recommends building exposure to value and cyclicals.
The brokerage is “overweight” on building materials, gaming, media, non-bank financial institutions, oil and gas, real estate investment trusts, rubber gloves, technology and utilities.
In a report, Kenanga Research points out that the reopening theme is catching on again as Covid-19 infections in Malaysia continue to decline while vaccination rates continue to go up.
“After several false starts over the past 18 months, the falling rate of infections that is finally taking root has led us to revisit the economic reopening theme.
“With the vaccination programme rapidly deployed since April, Malaysia may finally reach the 90% fully vaccinated rate among the adult population by the end of October,” it says.
Corporate earnings growth momentum remains positive, Kenanga Research says, projecting earnings per share to grow 41% this year and 2% in 2022.
It adds that continued corporate earnings growth, attractive valuation and a relatively stable political environment will support the resilience of the local equity market against the impact of bond tapering by the US Federal Reserve and rising bond yields.
Meaningful uptrend
According to UOBKH, Malaysian equities are expected to stage a “meaningful uptrend” through the fourth quarter of 2021. This, it says, is in tandem with the nation achieving its Covid-19 vaccination threshold, which would allow a fuller reopening of the economy.
“Economic reopening, commodity super-cycle and technology plays should gain more traction through the fourth quarter of 2021,” UOBKH says.
“Major beneficiaries of reopening include the tourism-dependent aviation and gaming sectors and banks,” it adds.
UOBKH’s top picks include CIMB Group Holdings Bhd, Genting Malaysia Bhd, Inari Amertron Bhd, MyEG Services Bhd, Press Metal Aluminium Holdings Bhd, Sunway Bhd, Telekom Malaysia Bhd and Pentamaster Corp Bhd.
The brokerage’s end-2021 FBM KLCI target of 1,635 points implies 16.2 times the estimated earnings for 2021.
UOBKH sees continuity to the FBM KLCI’s upside, with the index expected to hypothetically reach 1,775 points by end-2022.
MIDF Research’s end-2021 FBM KLCI target at 1,700 points implies 15.9 times the estimated earnings for 2022.
The brokerage has also introduced a preliminary FBM KLCI target of 1,765 points for end-2022, based on 16.5 times the estimated earnings of 2022.
“We expect the virtuous dynamics in the real economy would be mirrored in the financial economy with the end results being macro output recovery and higher equity market price, respectively.
“Under this scenario, based on earlier experience, we might also witness a so-called pent-up demand in the fourth quarter of this year,” MIDF Research says.
“Looking further into 2022, foremost in our mind is the progression of the Covid-19 situation. We adopt the view that Malaysia would soon move from Covid-19 pandemic into the endemic phase. Hence, we can expect the macro recovery later this year to continue into next year,” it adds.
It expects market valuation next year to be supported by continued macro recovery but moderated by the potential external headwinds.