Eastspring: Return to risk appetite among investors a wild card for KLCI

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KUALA LUMPUR (Jan 25): The shift into risky assets seen in 2016 set to accelerate in 2017 could boost the Malaysian market, after three years of subdued performance that saw valuations looking more attractive, according to Eastspring.

During the market outlook 2017 briefing today, Robert Rountree, global strategist of Eastspring Investments (Singapore) Ltd shared that the "yield hunt" had morphed into "yield with some risks", then yield with risk, and eventually risk, pointing to the increase in high yielding bonds shifting to the increase in low valued, high dividend cyclical, as indication of the increase of risk appetite.

He added that investors are returning to long-ignored market and sectors such as cyclical sectors and emerging markets, especially as profit forecasts are rising and the spillover effect of the risk appetite could be a wild card for the Malaysian market.

“The Malaysian market has always been a good story. It’s just that for an international investors, there are some other Asian equities market that are even more attractive. In comparison with the emerging and Asian market, Malaysia has always been somewhere in the middle. But if a Malaysian fund or a Malaysian wants to build up the Malaysian equities portfolio, I don’t think there is going to be a problem,” Rountree said during the briefing.

He added that with the emerging markets poised to perform better in 2017 and a return in risk appetite, the Malaysian market could see a turnaround story.

In line with Roundtree, Eastspring Investments Bhd’s chief investment officer (CIO), Rudie Chan, shared with the media that the FBM KLCI looks attractive in terms of valuation after a lackluster performance for the past three years, but expects the market to remain volatile until the return to corporate earnings upcycle.

“Corporate earnings growth remain tepid, but selective sectors relating to domestic consumption, infrastructure, commodities and exporters in general, will do well,” Chan said.

He added that price-earnings (P/E) ratio of the market has fallen below the 5-years average level of 17 times, and any indication on the return of earnings growth could see the P/E valuation dropped even further, making it even attractive for investors.

He also shared that the price-book (P/B) valuation was at an extreme low level, close to its 5-year low level, dropping close to 1.6 times, as compared to a 5-year average of about 2.1 times.

“Malaysia has always been a defensive market with huge domestic institution funds’ support, and that partly explains the relatively low market beta of 0.65 times. 

While 2017 is expected to continue to be volatile, we favor small and mid-cap stocks, as they are poised to benefit from the RM3 billion allocated special fund announced during the Budget 2017.

“Some of the thematic plays include the upcoming general election, stronger USD which will benefit the exporters like plantation, and selective income strategy,” Chan added.

As of noon market trading, the FBM KLCI edged higher by 0.17% to 1,683.50 points. Year-to-date, the Malaysian market has gained by 2.55% and advanced by 6.87% as compared to a year ago, indicating a return in strength to the market, giving weight to both Chan and Rountree’s presentation.