Higher KLCI targets amid cautious sentiment

by **Cals** Thu 02 Jan 2014, 09:53

Business & Markets 2013

Written by Levina Lim of theedgemalaysia.com

Thursday, 02 January 2014 09:35

KUALA LUMPUR: Malaysian equities had a good run in 2013, with the 30-stock benchmark FBM KLCI touching an all-time intra-day high of 1,882.2 on the last trading day of the year, closing at 1,866.96. Against 2013’s gain of 10.54% for the KLCI, research houses’ targets for 2014 appear slightly muted.

A look at some research houses’ KLCI targets for 2014 showed year-end forecasts ranging from 1,920 to 2,030 points, with CIMB Research having the most optimistic forecast.

The research house cited a well-executed Economic Transformation Programme as a key catalyst for its optimism in the broader market as well as more subdued political risks after the 13th general election.

Maybank Investment Bank Research, which has a KLCI target of 1,940 points, pointed out that Malaysia’s strong macro-economic fundamentals and corporate balance sheet strength bodes well despite expensive valuations for Malaysian equities.

“Political concerns have diminished, fiscal balance issues are being addressed and domestic liquidity remains ample.

“While the KLCI’s16.3 times one-year forward PER [price-earnings ratio] on an 8.1% earnings growth offering implies a rather ‘pricey’ price-earnings to growth of two times, the sustainability of Malaysia’s longer term growth on strong macro-economic policies and banking and corporate balance sheet strength will continue to lend support to the premium rating,” said the research house in its strategy report.

“We expect Malaysian equities’ defensiveness to stand out yet again amid external volatilities in 2014, albeit at a milder level with the US QE [quantitative easing] taper being priced in,” it added.

The seven research houses’ targets averaged out to 1,957, equating to a 4.8% increase for the index, which closed at 1,866.96 on Tuesday.

This is lower than the 10.54% increase in the KLCI in 2013.

The lower growth expectations came amidst concerns mainly of a pullback of foreign funds as a result of Federal Reserve tapering of its quantitative easing policy and poorer consumer sentiment due to fiscal consolidation.

A pullback in foreign investor funds in Asian markets is expected after the Fed announced its decision to taper by US$10 billion (RM32.8 billion) per month to US$75 billion starting this month, with the expectation that it occurs at a modest pace in 2014.

“There could be a pullback in terms of foreigners investing in this part of the region, but that’s only temporary … the Fed is tapering gradually, which is the right strategy,” said investment manager at Aberdeen Asset Management Sdn Bhd, Bharat Joshi.

Nomura Equity Research warned that Malaysia, along with Indonesia, India and Thailand appear to be the most vulnerable to a “disorderly QE unwind” scenario.

“This is due to higher than average equity inflows to local stocks since 2011, non-financial sector corporate net debt, and economy-wide private-sector debt,” it said.

Michael Kurtz, global head of equity strategy at Nomura Equity Research, said that the best performing sectors in 2014 are likely to be externally focused.

“We are not negative on domestic cyclical stocks per se — Malaysia is one of the economies we feel more confident with, along with Philippines and South Korea,” he said in a phone interview with The Edge Financial Daily.

“However, defensive stocks such as telcos, utilities and consumer staples are likely to underperform in 2014 and we have recently downgraded telcos to underweight,” he said.

According to Bharat, the education and healthcare sector are key focus areas in Malaysian equities for 2014, while consumer staples and telcos are on the wary watchlist.

“Generally, investors are looking at where Malaysia’s strengths are — Malaysia wants to be the education and healthcare hub, and the reason for that is because we have plenty of landbank.

“We are tapping on both Singapore’s expensive healthcare — where we see Singaporeans coming over to Johor — and benefiting from the setting up of education hubs in Johor and private schools around Kuala Lumpur,” said Bharat.

“Well-to-do Indonesians who are looking for good healthcare but who do not wish to pay Singapore prices are coming to Malaysia,” he said.

On the education sector, he said education providers who are keen on expanding are an indicator of the positive outlook on the sector, pointing to Epsom College set up by AirAsia Bhd’s Tan Sri Tony Fernandes.

Bharat said: “The government is also trying to push Visit Malaysia 2014 — we are seeing theme parks coming into the market and that could be a pull factor.

“Increased tourism should play quite a role because when local domestic consumption slows, they can easily take over and that’s quite crucial because we still need to iron the chains of consumption — if people are not consuming, at least your tourism sector picks up, so that’s positive.

“What we are going to see is more intra-Asean trade in certain sectors taking a role rather than FDIs from the West coming into the market,” he said, adding that he foresees consumer staples, property and REITs underperforming in the coming year.

Meanwhile, most research houses are “neutral” on the telco sector due to intensifying competition, decline in SMS revenues and increased capital expenditure.

They remain bullish on oil and gas, construction, aviation and utilities.

The sectors most have a cautious view on are consumer, property, automotive and gaming.

Nevertheless, CIMB is bullish on gaming and property. It said it believes the government’s measures to curb speculation will be short lived and buyers’ appetite will return in the second half of 2014.

Meanwhile, Bharat is “neutral” on telcos and consumers.

“I would say that consumer names which have been very strong this year and the last would see some profit taking — companies the likes of Nestle (Malaysia) Bhd, Dutch Lady Milk Industries Bhd, Fraser & Neave Holdings Bhd might experience some headwinds in terms of being able to grow their topline, so they would be the ones that might see some profit-taking as valuations for the consumer sector are not cheap,” he said.

“I think that the outlook for 2014 is going to be slightly below expectations and a lot more cautious and the reason for that is because there is a lot more challenges, both external and internal,” he added.

This article first appeared in The Edge Financial Daily, on January 02, 2014.