KUALA LUMPUR, Sept 4 -- AmInvestment Bank Bhd has cut the FBM KLCI end of 2019 target by 140 points to 1,680 points amid lacklustre corporate earnings in the just-concluded second-quarter results, coupled with the possibilities of investors continue to lighten their positions in emerging markets.
The FBM KLCI opened at 1,593.97 today, 2.45 points higher as compared with yesterday’s close.
“There was literally zero “wow” factor in the just-concluded (second quarter 2019) quarterly results, with none of the FBM KLCI component stock under our coverage beating our projection, while eight of them actually coming in below our forecasts,” said the bank in a research note today.
Plantation giants, Sime Darby Plantation and IOI Corp were disappointed due to weak Crude Palm Oil (CPO) selling prices realised and margin compression at downstream operations, while glove makers, Top Glove and Hartalega missed forecasts due to margin erosion from the heightened competition on the heels of increased capacity in the industry.
Earnings disappointments also came from national utility company Tenaga Nasional Bhd amid its slightly higher-than-expected interest expense, Press Metal with a double whammy of weak aluminium selling price and high input cost of alumina, Nestle (Malaysia) Bhd also saw weak export sales, higher costs of inputs such as barley, wheat and cocoa and IHH Healthcare had higher-than-expected tax expense.
Investors are likely to continue to lighten their positions in high-risk asset classes, such as equities and emerging market (EM) assets while seeking refuge in safe-haven asset classes in developed market bonds and even zero-yielding precious metals said the bank.
Typically, an easing cycle in the United States (US) shall usher in a new capital inflow cycle to EMs, including Malaysia, as investors hunt for yield. This was the case in June and July 2019 when EM bond funds and Malaysian Government Securities (MGS) both attracted substantial net inflows.
“We were hopeful then that the inflows would eventually spill over to equities but this did not materialise. As it stands now, the tailwind of accommodative monetary policy by key central banks in the world has been negated by the headwinds of the heightened US-China trade tensions and a mounting global recession risk, as illustrated in the flattened, and at times, inverted US bond yield curve,” it explained.
“We now hold the view that the FBM KLCI is unlikely to trade in line with its historical average, at least over the immediate term, as we believe the risk-off trade will prevail over the rest of 2019.”
Hence, the latest outlook on the FBM KLCI index of 1,680 points is based on 17 times on its revised 2020 forecast earnings projection at a discount to its 5-year historical average of about 18 times. This compares with 1,820 points based on 18 times of previous 2020 forecast earnings projection, it said.
The bank believes the market’s near-term supports could come from the low valuations the FBM KLCI from a historical standpoint coupled with market-friendly policies, such as the government’s blessing for the consolidation of the local telco sector as both Axiata and Digi.Com are component stocks of the FBM KLCI, carrying weighting of 4.6 per cent and 3.6 per cent respectively.
“Further easing of forex rules to mitigate the risk of Malaysia being removed by stock market indices provider FTSE Russell from the FTSE World Government Bond Index during its upcoming Sep 2019 review and the pendulum of the US-China trade tensions is to swing from escalating to easing could also help support Malaysian market,” it added.