This article first appeared in The Edge Financial Daily on July 2, 2018
KUALA LUMPUR: The FBM KLCI’s worst quarterly performance since 2011 has dragged its performance for the first half of 2018 (1H18) into the red with a decline of 5.9% year to date. The benchmark index fell by 9.23% in the second quarter (2Q) of this year as uncertainties sparked large outflows among foreign investors following the country’s 14th general election that saw a change in government for the first time since independence.
Nonetheless, despite the decline, Rakuten Trade Sdn Bhd head of research Kenny Yee told The Edge Financial Daily that the second half could see the FBM KLCI rebounding as the selldown is deemed to be overdone.
“Index-related counters are ripe for pickings following the recent selldown,” Yee said.
Yee’s view is supported by the consensus target prices (TPs) for the component stocks of the FBM KLCI. The index component stocks have an average potential return of 11.3% over the next 12 months, according to Bloomberg data. Only four component stocks have lower TPs than their last closing prices while only one is not tracked by analysts.
Axiata Group Bhd, Telekom Malaysia Bhd and Genting Bhd are the top three companies with the highest potential returns of 43.98%, 36.82% and 36.10% respectively. Hap Seng Consolidated Bhd is not tracked by any analyst while Nestle (Malaysia) Bhd, Hartalega Holdings Bhd, KLCCP Stapled Group and PPB Group Bhd appeared to be trading above analysts’ average TPs.
It is also worth noting that preliminary trading data last Friday showed that net buying emerged among foreign investors for the first time since May 2, bringing the foreign fund outflow to a halt after 37 consecutive days of selling.
However, not everyone is convinced especially with so much uncertainties still on the horizon.
“I think what we are seeing now is the window-dressing activities for the first half of the year. It’s not something that is sustainable especially given the environment that we are in today,” an analyst said.
He added that the uncertainties are coming from both domestic and external fronts.
“If you look internally, we need to look at what the new government will propose. It’ll be the first 100 days since they took office soon and Pakatan Harapan will be under immense pressure to fulfil most of its promises during the election campaign. There is also the introduction of SST (sales and services tax), the revised budget 2018 and budget 2019. Let’s not forget about the removal of some of the management teams at some of the GLCs (government-linked companies). All of these create uncertainties and the market dislikes that,” he said.
On the external front, he pointed to the escalation of trade tension between the US and China as well as other developed economies such as the European Union as a concern.
“We’ll see the implementation of the trade tariffs on July 6. While the market has started to price in some of these impact from the trade tariffs, a full-blown trade war could see a sharper decline in the market,” he said.
Loui Low, head of retail research at Hong Leong Investment Bank, also agreed that it is too early to expect a rebound in the market as the current development remains mildly negative for the stock market.
“We believe that recovery should be seen in the fourth quarter as there are still a lot of uncertainties in the third quarter,” Low said.
He added that foreign funds have been selling the market consistently since May 2 with a total of RM10.79 billion sold off as at last Thursday. While he agreed that consensus TPs indicate potential upside, Low pointed out that there have been more downgrades recently and there is a risk that this trend may continue into the third quarter.