KUALA LUMPUR: Affin Hwang Capital Research has lowered the FBM KLCI year-end target to 1,200, alongside a higher market risk premium amid the ongoing Covid-19 outbreak.
It has also cut its FBM KLCI earnings per share (EPS) growth forecast to -4.7% to reflect the cut in gross domestic product (GDP) growth to 3.3% from 4%, although the risk remains to the downside should Covid-19 prolong.
The key index has lost 15.4% year-to-date, but there may be a further downside as valuations still look too optimistic, while the sharper correction in regional markets has further accentuated the FBM KLCI’s valuation premium, said Affin Hwang Capital Research.
“Global equity markets suffered a major rout last week reacting to prospects of a global economic slowdown. While market behaviour may not have been rational, the liquidity-driven equity bull market and lofty valuations may not have helped,” it said in a note today.
To reflect an even more cautious view of the market, Affin Hwang Capital Research has downgraded the plantations, oil and gas, financials, gaming, utilities, transport and logistics, building materials and electronics manufacturing services sectors.
“We add dividend plays into our Top Buys, which we think will better withstand the market volatility ahead,” it added.
While the long-term correlation for economic growth and the FBM KLCI are low at 0.25, Affin Hwang Capital Research said the correlation actually increases to 0.7-0.8 during times of sharp economic slowdown.
“Our Economics team is forecasting the first quarter of 2020 GDP growth to decelerate to 2.5% from 3.6% in the fourth quarter 2019, and believe that this could be the precursor for a further derating of the market.
“Any further selldown in global equity markets, as it digests a global slowdown, will likely compound this problem,” it added.
Over the past 30 years, the FBM KLCI has undergone four major bear markets – 1993-1995 (capital reversal), 1997-1999 (Asian financial crisis), 2000-2001 (Dotcom bubble) and 2008-2009 (global financial crisis).
To date, the market has already corrected 27.84% from its recent high of 1,863.46 in 2018, falling alongside global equity markets and coinciding with the spike in the VIX Index, a real-time market index that represents the market’s expectation of 30-day forward-looking volatility.
For the FBM KLCI, the underperformance could be attributed to several reasons including disappointing corporate earnings growth, uncompelling valuations and the recent change in government.
“The global Covid-19 outbreak and the oil price crisis, sparking concerns over a global slowdown, just added to the pain,” said Affin Hwang Capital Research. – March 16, 2020, Bernama
