This article first appeared in Capital, The Edge Malaysia Weekly, on November 9 - 15, 2015.

Corporate earnings for the third quarter of this year (3Q2015) are not expected to add much excitement to the local bourse, which is currently trading directionless amid a lack of catalysts.

Fund managers say the FBM KLCI has already priced in the expectation of weak earnings.

“The expectation of bad news in corporate earnings this season has already been priced in, judging from the heavy foreign outflows this year,” Danny Wong, chief executive of Areca Capital Sdn Bhd, tells The Edge.

According to MIDF Equities Research, the cumulative net foreign outflow from Bursa Malaysia rose to RM11.7 billion at end-July. The total outflow last year was only RM6.9 billion.

The FBM KLCI had begun stabilising at just above 1,700 points from June onwards before the worldwide rout in August, which sent the benchmark index down more than 12% to a three-year low of 1,532 points.

The local bellwether has since struggled to remain above the 1,700-point mark. However, it did regain some strength and closed at 1,688.54 points last Thursday.

According to MIDF Research head of equity research Syed Muhammed Kifni, the FBM KLCI will trade at around 1,650 points by the end of the year.

For the quarter ended Sept 30, local companies were impacted by the ringgit’s sharp depreciation. Year to date, the currency has depreciated 23.3% against the US dollar and was at 4.3112 last Friday.

Although the weaker ringgit is a boon for export-oriented companies, it is a bane for companies with high import content and those with borrowings denominated in US dollars, as debt servicing now costs more in ringgit terms.

The low ringgit will result in larger foreign exchange losses across the board, which would eat into companies’ earnings. That said, TA Securities head of research Kaladher Govindan says foreign exchange gains or losses are balance sheet items for now, and may not be realised.

Glove makers and the print media are among the sectors that could be affected by rising input cost as a result of the currency’s depreciation, says Wong. “Material cost [for the print media sector] will be higher because newsprint is usually sold in US dollars or euro.”

Media stocks that could be affected include Media Prima Bhd, Star Media Group Bhd and Utusan Melayu (M) Bhd.

Local rubber glove makers have been the darlings of the stock market, thanks to their high export orientation and earnings in US dollars. Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd have been the key beneficiaries.

However, says Wong, the companies typically order glove moulds from Europe and this would increase their cost. “But they may not be impacted as much because they can pass down the cost,” he adds.

While these companies are expected to continue to perform well, most analysts think glove manufacturers are starting to look pricey. In fact, AmResearch has downgraded Hartalega to “fully valued”.

See the table for analyst expectations.

Apart from the weak ringgit, there are other factors plaguing local corporate earnings.

“At best, the 3Q2015 results season will be lacklustre. The effects of the Goods and Services Tax, poor consumer sentiment and political uncertainty will likely lead to reduced earnings,” Etiqa Insurance & Takaful head of research Chris Eng tells The Edge.

“Telecommunications companies have already reported weak earnings. I expect banks to follow suit, and oil and gas and plantation companies should also report poor numbers,” he says.

The plantation and oil and gas sectors have been affected by the dismal commodity prices this year.

TA Securities is forecasting Brent crude oil to average between US$45 and US$55 per barrel next year. “This could plunge to below US$40 per barrel if Iran decides to raise its production next year,” Kaladher warns.

Areca’s Wong, however, is of the opinion that markets seem to have priced in an oil price assumption of US$40 to US$60 as the new normal. “As long as this is stable, then it is a positive for the market, and some oil and gas players that have been sold down could see interest.”

As for plantation companies, the low crude palm oil (CPO) prices would not help. “The only bright spot I can see for next year is the possibility of El Niño, which will drive up CPO prices,” says Kaladher.

He is not the only one who is hopeful of a turnaround for plantation counters.

Syed Muhammed says, “We are positive about the plantation sector as the weather factor may be supportive of CPO prices going forward. Our top picks are Sime Darby Bhd and PPB Group Bhd.”

Analysts like planters with young palm profiles as they are near peak production. Among those named are Kim Loong Resources Bhd, United Malacca Bhd, Genting Plantations Bhd and TSH Resources Bhd.

“Against a backdrop of recovering earnings growth next year, we place our 2016 FBM KLCI target at 1,800 points,” Syed Muhammed tells The Edge.

Although Wong declines to give his forecast for the FBM KLCI, he is optimistic about the local bourse. He expects upside surprises from certain sectors as domestic fundamentals remain intact.

According to him, investors should keep an eye on the semiconductor sector, namely Globetronics Technology Bhd and Inari Amertron Bhd. “These stocks will benefit from demand as competition between Samsung and Apple heats up. They could be even more aggressive than they are this year, and these companies compete on features, not pricing.

“Globetronics is more innovative and will be able to command a higher yield while Inari has been bulking up capacity and should see volumes increase.”

The beauty of such semiconductor plays is that their costs are in ringgit while sales are in US dollars, resulting in fatter margins in the present climate, Wong points out.

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