M’sian equity market to grind upwards — Eastsprings

by **Cals** Thu 10 Jul 2014, 02:26

Business & Markets 2014

Written by Yen Ne Foo of theedgemalaysia.com

Wednesday, 09 July 2014 09:56

KUALA LUMPUR: As foreign investors tip-toe back into the region following improvement in the global economic outlook, the Malaysian equity market is expected to lag behind its neighbours in the second half of the year due to its relatively higher valuation.
“Malaysia equity has done very well in the last two years. In fact, we have done a lot better than many of our neighbours. Precisely because of that, our valuation is actually higher than many of our neighbours,” said Chen Fan Fai, Eastsprings Investments Bhd’s (Eastspring) chief investment officer and country head.
Year-to-date, the FBMKLCI rose 2.94% to an all-time high of 1892.65 points at market close yesterday. In comparison, Singapore’s Straits Times Index has gained 5.27%; the Jakarta Stock Exchange Composite Index jumped 19.4%; Thailand’s SET was up 18.6%; and the Philippines’ Philippine Stock Exchange Index has rallied 19.8%.
Chen said that Malaysia which has traditionally been viewed by investors as a “safe haven” and the “less volatile market in the region” will become less appealing as investors’ risk aversions start to go down.
“When money is allocated to the region [now], people are more willing to go into the other markets. We are, in some sense, losing our safe haven premium,” he added.
As a result, Eastpring expects the local equity market to be grinding its way upwards mainly driven by earnings growth and not the valuation multiple expansion it has seen in the last two years.
“The March quarter reporting season was generally unexciting with the majority of stocks reporting earnings that were in line or below. Post results, earnings have been downgraded and generally consensus is expecting single-digit to low-double-digit growth in 2014-2015,” said Chen.
However, investors can still find value in the medium-to-small capitalisation companies as Eastspring expects earnings growth in these companies to strengthen in the next year when compared to the big capitalisation companies in the Malaysian equity market.
Meanwhile, the Malaysian economy will stay resilient and will ride the global recovery due to strong domestic demand which is driven by a revival in the private investment cycle and a sustained increase in consumer spending.
He added that Malaysia will see investments-led growth, citing the Economic Transformation Programme, upcoming infrastructure projects and Petroliam Nasional Bhd’s (Petronas) RM300 billion capital-expenditure budget over the next five years as catalyst.
Chen expects that Bank Negara Malaysia (BNM) will likely increase overnight policy rate (OPR) by 25 basis points in either July or September as a preemptive measure to control inflationary expectations.
“We have been experiencing negative interest rate for the last six months, meaning inflation is running well ahead of OPR . That is not healthy if it goes on for long because it encourages excessive risk taking. This is why we have taken the view that BNM will increase OPR,” he added.
Besides that, Chen expects the Malaysian ringgit will remain rangebound between RM3.20 and RM3.30 against the US dollar with intermittent volatility due to high foreign holdings of financial assets and outflow of short-term capital.
While having the region’s second highest household debt levels is a concern, Chen said this will only become a risk if “the Malaysian economy and the global economy take a nosedive”.

This article first appeared in The Edge Financial Daily, on July 9, 2014.