Outlook 2014 Better outlook for Malaysian equities

by **Cals** Mon 30 Dec 2013, 16:32

Outlook 2014 Better outlook for Malaysian equities

Business & Markets 2013

Written by Yvonne Tan, Chief Investment Officer, Equities, Eastspring Investments Bhd

Monday, 30 December 2013 16:25

WE expect the Malaysian economy to grow between 5% and 5.5% in 2014, driven by steady growth in domestic demand. Private investment will continue to grow at a double-digit pace, supported by the ongoing Economic Transformation Programme.

We also expect decent export recovery next year. The global economic outlook is improving with the US economy showing good signs of recovery, for example improving employment numbers. The US housing market, which forms a large part of consumption spending, has been rising with strengthening house prices. House inventory levels are hovering near 11-year lows. As for Europe, although recovery is weak, the worst is most likely behind it. We are looking at around 1% growth for the eurozone next year.

For China, growth will likely slow to around 7% next year, but that is still decent, considering the country’s huge economic base. China’s reforms will benefit it in the long run. Against this backdrop, we expect Malaysia’s economic outlook to be pretty decent and supportive of stronger earnings growth for local corporations.

We expect a better year ahead for the Malaysian equity market, mainly supported by earnings recovery following lacklustre 2013 earnings. Consensus earnings forecasts were on a downward trend through 2013 and we only started seeing signs of improvement in the 3Q2013 results.

With stronger oil and gas orders, improving crude palm oil (CPO) prices, less external sector drag and a lower base in 2013, we expect market earnings to grow between 10% and 12% next year. Assuming no price-earnings ratio expansion next year, the stronger earnings growth is expected to support about 10% upside from the current level.

Despite our overall positive view of the Malaysian market next year, we think the journey will be volatile.

We are cautious about the first half of 2014, mainly on concerns over the impact of US quantitative easing tapering. We think QE tapering may have a negative impact on the Malaysian bond market, which may result in weakness in the ringgit. Equities with high foreign holdings may also be negatively affected. Other short-term headwinds will be the continuation of subsidy rationalisation and credit tightening, which may impact domestic consumption growth. We expect the government to front-load as much of the subsidy rationalisation plan as possible early next year, in tandem with BR1M payments, which are normally distributed in the first half of the year. Staying true to the fiscal consolidation path should deter rating agencies from downgrading Malaysia’s sovereign rating, although consumer demand resilience will be under pressure.

We are more positive about the outlook for 2H2014. Barring any unforeseen shocks or crises, we expect corporate earnings growth to drive better market performance in the second half. Sectors that will boost market earnings growth include utilities, plantations, oil and gas, banks and telecommunications. We continue to like the oil and gas sector, given the robust activities and rising contract flow; the plantation sector for potential supply tightness and rising CPO prices; and selective insurance, telecommunications, construction, industrial and consumer plays.

Small caps have done very well this year, but how about 2014? Despite its sterling performance in 2013, the FTSE Bursa Malaysia Small Cap Index is still trading at a modest forward PER of 10 times, which is at a five to six times PER discount to the big caps. Given that there may be more inflows into the small-cap mandates, these stocks might continue to rally for some time, although we caution against the high volatility of small caps — investors have to be very selective in their picks.

As for the big caps, their upside will be driven mostly by earnings growth because valuations are quite fair at current levels. Selected mid caps may be the play for next year and we expect the big-cap laggards to catch up subsequently.

This article first appeared in The Edge Malaysia Weekly, on December 23, 2013.