SENTIMENT on Bursa Malaysia is expected to stay weak with downside risks in 3Q 2022F as the local bourse attempts to price in the peak of US interest rates, thereafter the market could be range-bound and rebound if concerns over rate hikes or US recession risks subside.
This, according to CGS-CIMB Research, could offer opportunities for investors looking for bargains. It further foresees upside from the following:
- A potentially stable political environment in Malaysia post the general elections;
- The return of foreign workers;
- Better-than-expected tourist arrivals;
- Easing inflationary pressures;
- Resolution to some of the ESG concerns;
- A market-friendly Budget 2023; and
- Return of strong net buy flows by local institutional investors.
“Overall, we expect the market to stay volatile in 2H 2022F,” opined head of research Ivy Ng Lee Fang and analyst Nagulan Ravi in a Malaysian strategy outlook.
“The FBM KLCI’s performance in 1H 202 was below our expectations as rising inflation pressures, more substantial interest rate hikes, a slowdown in China’s economic growth, and escalating sanctions related to Russian invasion of Ukraine set back expectations of a recovery in corporate earnings in 2H 2022F.”
On top of this, CGS-CIMB Research expects Malaysian corporates to continue facing challenges from higher wages, delays in arrival of foreign workers and regulatory risks.
Tracking previous market downturns to gauge the downside risks to the FBM KLCI should the global economy fall into recession, the research house expects potential earnings downside risks of 19.4%/17.3% to its current 10.7% 2023F FBM KLCI earnings per share (EPS) growth forecast if the earnings risks resemble those of Global Financial Crisis (GFC)/COVID-19 periods (-8.7%/-6.6%).
“Applying this to our target P/E (price-to-earnings ratio) of 12.9 times gives us a lower FBM KLCI target of 1,213/1,245 points,” projected CGS-CIMB Research.
“If we were to widen the P/E discount to 3 s.d. (standard deviation) from historical average P/E against our existing 2023F earnings projections, we arrive at a KLCI target of 1,432 points.”
All-in-all, the research house decided to lower its end-2022 FBM KLCI target to 1,506 points to reflect its earnings downgrade for Top Glove Corp Bhd and MR DIY Group (M) Bhd.
“We now project the FBM KLCI earnings to fall 0.1% in 2022F and rise 10.7% in 2023F. This lowers our end-2022 KLCI target to 1,506 points (from 1,568 points previously) on unchanged 12.9 times target P/E,” noted the research house.
“We advise investors to take shelter in sectors with defensive earnings (utilities, telco, healthcare, consumers) and high dividend yields. We also like banks as beneficiaries of rising interest rates.” – July 12, 2022
