Friday 29 Mar 2024
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KUALA LUMPUR: Malaysia's economic data have been trumping expectations -- it's GDP or gross domestic product grew at its fastest pace in three years in the third quarter, expanding 6.2% year-on-year, while the ringgit recovered to its strongest level against the US dollar in 15 months last week.

Then there's the emerging-market equity bull run, which is now in full swing on the back of broadly positive economic data across the globe.

But these, coupled with the country's consistent double-digit export growth, have not been able to stoke much interest in Malaysian equities, wrote The Edge Malaysia's assistant editor Ben Shane Lim and senior writer Ahmad Naqib Idris in the publication's cover story 'Diverging sentiment', for the week of Nov 27-Dec 3.

The local benchmark FBM KLCI only managed a 4.6% gain, a pathetic rise when compared with that of other emerging market indices, and is one of the worst performers in Asia Pacific -- recording a one-year gain of only 5.57% as at last Thursday, compared with over 20% by some of its regional peers -- the weekly wrote.

It also observed that many blue chips that drove the index up in the first three quarters of the year made a U-turn in mid-September.

"Take CIMB Group Holdings Bhd — a 57% increase in the company’s share price accounted for 32% of the FBM KLCI’s stellar performance until Sept 12, but an 8% decline in it has accounted for 18% of the index’s fall since then. Did CIMB’s fundamentals deteriorate substantially? No. The same can be said for the other 21 constituent stocks that have lost ground in the past 2½ months," the publication noted.

JP Morgan’s head of Malaysian equities research Mak Hoy Kit told The Edge that nominal GDP growth has not been proportionately reflected in corporate earnings.

The country's nominal GDP (not adjusted for inflation) grew 11.6%, 10.2% and 9.9%, or an average of 10.6%, y-o-y in the first three quarters of 2017, respectively. In contrast, Bloomberg data showed the aggregate earnings of the FBM KLCI’s constituent stocks grew only 6.7% y-o-y to RM105.76 per share. The difference of about 3.9 percentage points is huge with the corporate earnings growth of blue chips lagging GDP by more than one-third, the weekly wrote.

So any upside will have to be driven by a jump in corporate earnings. But the latest Malaysian Institute of Economic Research Consumer Sentiment Index for the third quarter of this year slipped 3.6 points quarter-on-quarter to 77.1 points (values below 100 are considered negative) on a softer income growth outlook and ongoing inflation concerns, it noted.

The Business Conditions Index also fell to 103.1 points from 114.1 points. Though at above 100 it's still in the positive, the index decelerated on weaker manufacturing sales and a slowdown in production. At the same time, Nikkei’s forward-looking Purchasing Managers’ Index (PMI) remained relatively depressed despite the strong GDP numbers and hovered below the 50-point mark, indicating contractionary conditions. In October, Malaysia’s PMI fell to 48.6 from 49.9 in September.

So what is happening? Why do such negative sentiment persists when one of the keener barometers of broader market sentiment — the ringgit’s value — has strengthened substantially and breached the 4.10 mark against the US dollar last week, touching 4.0965 on Tuesday — its strongest level in 15 months.

"Understanding the reasons for the lacklustre performance of the FBM KLCI is crucial. If the index’s component stocks have in fact become undervalued, this could present an investment opportunity. However, investors should be cautious if the opposite is true, as the market is (accurately) pricing in negative expectations that have not yet been reflected in the broader economic data," the weekly wrote.

To find out what are the underlying factors at work and what are the things investors should keep a close eye on to get a better sense of the market's prospects, pick up a copy of The Edge at newsstands near you. Or save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

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