Friday 29 Mar 2024
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KUALA LUMPUR (July 22): The FBM KLCI has regained all of its losses this year, making it the clear outperformer among its regional peers, which were still seeing double-digit declines year-to-date (YTD).

YTD, the local benchmark index was marginally higher by 0.45% to close yesterday at 1,595.93 points. The biggest loser, among the regional indices, is Philippines’ PSE Composite Index that fell 21.48% YTD, followed by Indonesia’s Jakarta Composite Index’s -18.81% and Singapore’s Straits Times Index’s -18.41%.

The question is whether the uptrend in the FBM KLCI can be sustained.

Notably, the FBM KLCI has surged 30.84% from the 10-year trough of 1,219.72 points on March 19. This year, the index had breached the psychological 1,600 threshold on July 13 at 1,606.43 – a level that has not been seen since early January.

Interestingly, the Bursa Malaysia EMAS Index, down just 0.18% YTD, has nearly recouped its losses seen this year. Bursa Malaysia Small Cap Index, however, was still 9.83% lower.

While it might be too early to determine the market’s direction for the rest of the year, most research analysts contacted by The Edge CEO Morning Brief appear to be bearish on the FBM KLCI’s performance moving forward, although they expect the FBM KLCI to continue outperforming its peers.

Rakuten Trade Sdn Bhd head of research Kenny Yee, who is forecasting the FBM KLCI to end the year below 1,500 points, said the benchmark index lacks catalysts. “In fact, we are looking at a double-digit decline in earnings growth,” said Yee.

“Valuations are no longer playing a major role now and earnings now have been pushed back to [the level of] two to three years [back],” he said, adding that the price-to-earnings of the KLCI now stands at 20 times.

He, however, said there could be a possibility that the local benchmark index would remain at current levels, driven by the liquidity in the market.  

Nevertheless, he believes that the FBM KLCI could maintain its position as one of the best performing markets in the region, as the local market’s volatility is the lowest.

“It is not surprising that it outperformed the region this time round,” Yee noted, saying that the liquidity play has been strong, given the low interest rate regime.

MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Yusof, who has an even more bearish view, is expecting FBM KLCI to end the year at 1,320.

Imran is of the view that the other sectors will continue to lag, despite the outperformance of glove counters. “If we were to examine the sectoral indices, healthcare and tech indices are the only ones performing,” he said.

Furthermore, the economic situation has not improved as tremendously as the market suggests, he added.

“Basically, we believe that the market is being driven by liquidity either from the OPR (Overnight policy rate) cuts or the loan moratorium. However, the elevated valuation of the market may not hold, as we believe that the market will eventually follow the fundamentals (corporate earnings), which besides the gloves, will be less than stellar,” said Imran, adding that any correction could lead to more downside to the market.

Inter-Pacific Securities head of research Victor Wan concurred, saying it is still “too premature” to tell the direction of the FBM KLCI, and that the markets’ valuation looks expensive at this point.

“Apart from the [liquidity and pandemic story], I don’t think we can bank on the recovery story here,” he said.

“The elephant in the room is essentially what happens after September… about what will happen to the moratorium, if it could be extended or targeted,” he added.

However, should infections continue to rise which means strong demand for rubber gloves, the long gestation period, coupled with higher projected average selling prices (ASPs), as well as target prices upgrades, there could be a “strong chance” that the FBM KLCI will end the year strongly, said Wan.

Meanwhile, TA Securities chief investment officer Choo Swee Kee said the FBM KLCI will continue to be the clear winner among the regional peers, noting it would be “mathematically difficult” for the neighbouring markets to catch up, as they do not have significant healthcare stocks that could outperform.

“This is also on the expectation that our neighbours will only see significant recovery from Covid-19 next year, rather than this year,” Choo said.

He noted the benchmark index will continue gaining for the rest of the year on the back of glove stocks, due to the liquidity from record stimuli in the world market.

‘Glove counters could be the hero now and culprit later’

While the glove counters have evidently pushed the index higher, Rakuten Trade’s Yee said he is cautious about their performance.

“They could be the hero now and the culprit later on. If there is any U-turn in the market, investors will start selling the glove makers, as they have risen so much,” he said.

Notably, the two glove heavyweights — Top Glove Corp Bhd and Hartalega Holdings Bhd — are now the third and fifth largest counters on Bursa in terms of market capitalisation, at RM67.28 billion and RM61.7 billion respectively.

This means both now account for 12.58% of the weightage of the FBM KLCI.

Top Glove’s shares soared 430% YTD to close at RM24.94 yesterday, while Hartalega leaped 228% to close at RM18. Likewise, other glove counters have also seen quantum leap in share prices.

Undoubtedly, the main driver for the FBM KLCI thus far have been the glove counters, said MIDF’s Imran, noting that the FBM KLCI has gained circa 393 points as of Friday (July 17), from the trough of March 19.

“Of this, 144 points have been contributed by the two glove counters, Top Glove (93 points) and Hartalega (51 points). That is a 36.6% contribution,” he added.

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