KUALA LUMPUR: There is improving visibility for stocks on Bursa Malaysia in the upcoming fourth quarter (Q4).
This is helped by the cooling of political temperature, resilient corporate earnings, high vaccination rate, strength in export-led manufacturing and commodities (crude oil and crude palm oil), and comparative asset class attraction versus bonds and deposits.
Maybank Investment Bank (IB) Research said coupled with attractive valuations, especially in value and cyclical sectors, re-engaging domestic institutional liquidity is expected to take the FBM KLCI to its end-2021 target of 1,720 points.
However, it noted that an uncertain, extended economic reopening timeline and political uncertainties set the market up for a difficult Q3.
“As underscored by the government’s gross domestic product (GDP) forecast for 2021 having been slashed to 3% to 4%, from 6% to 7.5% previously, the phased National Recovery Plan (NRP) is a significant growth headwind,” said the research unit in a report.
Maybank IB Research did point out that sectors most at risk such as consumer, real estate investment trusts (REITs), tourism and aviation have low earnings share and FBM KLCI representation.
The research unit said that for Q2 of this year, it estimated its research universe’s core earnings to grow by 40.1% year-on-year (versus a 43.1% growth per its estimates post-Q1 of 2021 reporting), and for the FBM KLCI, by 38.7% (versus 49% previously).
Top Glove manufacturing
The gloves sector remains a key 2021 estimated earnings driver (96.1% higher year-on-year) even after recent forecast downgrades – the latter impact being largely mitigated by strong growth momentum for the banks, plantations and petrochemical sectors.
Maybank IB Research said that in Q2 of 2021, based on its research universe, four sectors reported earnings outperformance – banks, non-banking financial institutions (NBFIs), petrochemical and plantations, with record first-half 2021 profits for banks, gloves and petrochemical counters.
Sectors that missed earnings expectations were mostly consumer-related such as consumer, automotive, REITs and construction.
Meanwhile, UOB Kay Hian Research maintained its “overweight” call on the banking sector, given the favourable risk-to-reward balance.
“Although sector credit cost is expected to rise in the second half of 2021, as most banks are only expected to raise their pre-emptive provisions further in that period relation to the recent prolonged lockdown, we think that the overall positive sector sentiment should continue to gain traction into Q4 of 2021.
“This is supported by the imminent reopening of the economy on the back of high vaccination rates, potential upward surprise in dividends and still attractive overall sector valuations,” said UOB Kay Hian Research.
It noted that post-Q2 2021 results, its banking sector 2021 and 2022 earnings growth assumptions remain relatively intact at 26% and 15% respectively.
Higher credit cost estimates for Public Bank Bhd and Hong Leong Bank Bhd have been offset by stronger growth assumptions from Bank of Chengdu (where Hong Leong Bank Bhd has a 18% stake) and net interest margin (NIM) assumptions for Public Bank and CIMB Group Holdings Bhd.
UOB Kay Hian Research also said despite the challenging environment, most banks have normalised their dividend payouts in the recent Q2 2021 reporting season.
Rakuten Trade Sdn Bhd head of equity sales Vincent Lau (pic) said Q3 of 2021 will see some contraction in corporate earnings due to movement restrictions and limited operating capacities.
In fact, Malayan Banking Bhd (Maybank) and Public Bank have normalised their payout ratio in Q4 2020 while RHB Bank Bhd reported its highest ever interim dividend payout in Q2 2021.
Supporting faster-than-expected normalisation of dividends was that the banking system’s common equity Tier-1 (CET1) ratio had strengthened to 14.6% as at end-April 2021 versus pre-Covid-19 average levels of 14% (2019) despite the negative impact from the surge in pre-emptive credit cost and modification losses as overall sector had remained profitable.
Regarding the gloves sector, UOB Kay Hian Research maintained its “underweight” call as glove average selling prices (ASPs) had moderated slightly ahead of its expectations.
“We now expect normalised ASPs in mid-2022 as opposed to 2023 previously. Given that ASPs are no longer as lofty, downside risk from further disappointment is limited. That said, deferred capacity and sub-optimal utilisation rates are possible pressure points to the sector,” said the research unit.
Rakuten Trade Sdn Bhd head of equity sales Vincent Lau said Q3 of 2021 will see some contraction in corporate earnings due to movement restrictions and limited operating capacities.
“Those impacted are retail-related and construction companies, so earnings growth may not be there for them in 2021, but the Q4 2021 would see better results from them,” he told StarBiz. Lau added that sectors that would see record or super high corporate earnings this year include technology and semiconductors (like Malaysian Pacific Industries Bhd) as well as plantations, due to high crude palm oil prices.
“Going forward, stock investors may be rotating into recovery plays like Genting Malaysia Bhd and number forecast operators as well as banks which offer good dividend yields and room for capital appreciation,” he said.