After a lukewarm 3Q, analysts are ‘neutral’ on 4Q for local market

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KUALA LUMPUR: Described as the worst performing market in the region with a year-to-date (YTD) decline of 1.3%, the local market — together with global equities — could bounce back towards the end of the year after a phase of correction and consolidation, said RHB Research Institute Sdn Bhd chief economist Lim Chee Seng.

In his fourth quarter (4Q) 2014 strategy report published yesterday, Lim said global economic recovery should be on track in the absence of a major crisis, with no risk of any significant tightening in monetary policies or rate shock in the developed world.

“The outlook should gradually brighten as investors shift their attention to improving earnings prospects in the year ahead,” Lim said, adding that a possible catalyst coming from the impending announcement of Budget 2015 next week may excite investors.

M&A Research concurs with Lim and noted that “there are some bright spots in 4Q, including Budget 2015 [and] Umno general assembly in November, apart from [the] year-end window dressing activity”. But it said that risk-taking may still be capped and moderated due to several externally-driven factors.

“November-December is usually a good period for the equity market but we think the excitement will be capped by the strong blowing speculative activity on the US’ next monetary move,” the research house noted in its “Strategy Report: Malaysia 4Q Equity Outlook” released yesterday.

On outlook, Lim remains “neutral” on the market and maintains his end-2014 FBM KLCI target at 1,940 points.

“We project net EPS [earnings per share] growth for the FBM KLCI basket to improve to 7.3% in FY15 from 2.7% in FY14, and may likely continue to trend higher in FY16 when the 1ppt [percentage point] reduction in corporate income tax rate comes into effect.”

Meanwhile, M&A Research predicts “only a mild rally” in December with the FBM KLCI — which is projected to grow 3.4% year-on-year — to end the year at 1,930 points based on a price-earnings ratio of 17.5 times.

“The growth rate is still respectable given the FBM KLCI beta of 0.4 against S&P 500 of which the latter has jumped by 7.2% YTD in 2014. We call a “neutral” on FBM KLCI,” it said, adding that 2015 is “still a challenge to predict” and that 4Q 2014’s development will provide some good visibility.

As to the market’s performance in 3Q, M&A Research said it was within expectation, being neither bullish nor bearish.

“The third quarter has seldom been a good period for the global equity market historically anyway. Thankfully, none of the events in the third quarter turned into a deeper crisis that could paint a bleak picture in 4Q,” the research house further noted.

This article first appeared in The Edge Financial Daily, on October 2, 2014.