WHILE the market may stay choppy in October given concerns of market-spooking leftist taxes, prospect of an upside may resurface in the November-December period buoyed by the year-end window dressing activities.
For those who missed out on August’s Bursa Malaysia mini-rally (+7.1%), October could be the next boat to catch following September’s FBM KLCI decline (-4.1%), according to Hong Leong Investment Bank (HLIB) Research.
Currently, the FBM KLCI has declined -5.5% year-to-date, underperforming the ASEAN-5’s (Indonesia, Malaysia, the Philippines, Singapore and Thailand) -4.3% owing to (i) sell down in glove stocks; (ii) Malaysia having the highest COVID-19 cases per capita among peers which led to relatively more restrictive lockdown, and (iii) fluid political scenario.
“However, we reckon these negatives are waning – share price of glove stocks are now much closer to pre-COVID levels versus the start of the year, the economy is re-opening with high vaccination rates (third in ASEAN) and the political impasse has been resolved,” observed head of research Jeremy Goh and team in a market strategy note.
“Timeline-wise, we expect the market to stay choppy in October ahead of Budget 2022 given risk of ‘market unfriendly’ taxes. Nevertheless, an upward trajectory should resurface in November once the dust settles and investors re-focus on a rejuvenated economy.”
On a positive note, HLIB Research expects this upside bias to sustain into December given the traditional window dressing phenomenon whereby the FBM KLCI posted positive December returns in 11 of the past 12 years (ie since the Global Financial Crisis in 2008-2009) with an average positive return at 2.6%.
Commenting on the proposed capital gains tax on stocks and one-off windfall tax on “pandemic beneficiaries”, the research house noted that the negative economic ramifications from “such socialistic leaning taxes (eg loss of investor confidence and competitiveness) far outweigh the incremental government revenue”.
“Nevertheless, we find some solace that Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz (a former banking honcho who understands economics) has repeatedly voiced out against such taxes,” HLIB Research pointed out.
“We note that none of the countries in ASEAN-5 have capital gains tax on stocks for retail investors although some (ie Thailand) treat gains on stocks by local companies as revenue for tax purposes.”
The research house also sensed pockets of opportunity given after 25 months of consecutive selling (-RM36.6 bil from July 2019 to July 2021), foreigners finally turned net buyers in August-September (+RM2.1 bil).
“We believe that August’s foreign shareholding of 20.2% has scrapped the bottom of the barrel and is likely to have rebounded slightly in September. The return of foreigners should be positive for the market (70.3% correlation between the FBM KLCI and foreign shareholding),” opined HLIB Research.
All-in-all, the research house projected a FBM KLCI earnings growth of 18.6% and 4.2% for CY2021-2022 with an end-2021 FBM KLCI target of 1,640 based on 16.7 times price-to-earnings ratio (PE) tagged to mid-CY2022 earnings per share (EPS).
Its top picks are Malayan Banking Bhd (Maybank), Tenaga Nasional Bhd, Telekom Malaysia Bhd, MR DIY Group (M) Bhd, Dialog Group Bhd, Sunway Bhd, V.S. Industry Bhd, Astro Malaysia Holdings Bhd, Bumi Armada Bhd, Kobay Technology Bhd, MBM Resources Bhd and Focus Point Holdings Bhd. – Oct 3, 2021
