Falling oil price a double-edged sword, says RHB Research

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KUALA LUMPUR (Dec 15): Falling oil price will not be as damaging to the Malaysian economy as feared and indeed could act as an indirect tax cut to boost economic growth for the major oil importing countries, according to RHB Research.

In a stategy note Monday, the research house said market valuations would likely improve as corporate earnings recover and stabilisation of oil prices will in turn, lead to investors returning to this unloved and under-owned market.

RHB Research said meanwhile, the direction of the market would also be dictated by external events.

“These include the strength of global economic growth, changing expectations on the timing and speed of the US rate-hike cycle, forex volatility and risks of geopolitical shocks.

“Our key assumptions are: i) the global economic recovery will unlikely be derailed, ii) no risk of significant tightening of monetary policy in developed economies to trigger a rate shock, and iii) crude oil prices will ultimately stabilise and act as a catalyst for the market to bounce back,” it said.  

The research house said it was also worth noting that sharply lower crude oil prices would  help to boost global growth by acting like a “tax cut” for oil importing countries.

It said with the global asset reallocation process already underway, it will likely be completed by the time the US Fed decides to hike rates.

The research house said global portfolio managers may begin to shift focus and look at  the strengthening US economy lifting exports and economic growth of emerging markets.

RHB Research said it opined that equity valuations would likely improve as corporate earnings recover driven by corporates leveraging on their investments in manufacturing capacity, manpower and technology in the last two years. 

“We forecast EPS growth for the FBM KLCI stocks to reverse trend and pick up to 7% and 7.8% for 2015 and 2016 respectively, from 0.3% estimated for 2014.

“The Government’s commitment to fiscal reform, the economy turning out to be better than feared and Malaysia being under-owned by foreign institutional investors are factors that could rekindle investor interest. 

“Our end-2015 target for the FBM KLCI is 1,960 points based on 16.5x 1year forward earnings,” it said.

On market stratregy, RHB Research said it continued to prefer stocks that can offer clear earnings growth trajectories with good fundamentals to create shareholder value.

“Our key “Overweight” sectors include construction, tech, aviation, rubber gloves, basic materials, logistics and utilities,” it said.