This article first appeared in Capital, The Edge Malaysia Weekly on October 8, 2018 - October 14, 2018

NEARLY five months after the historic 14th general election, the worst of foreign selling on the Malaysian stock market appears to be over. But analysts caution that there is still internal and external volatility.

“At the height of foreign selling post-GE14, we saw a total of RM12.2 billion in net foreign outflows for May to July before the foreign unwinding subsided in August. In fact, in September and October [so far], foreign funds have been net buyers with net inflows of RM66.3 million and RM67.3 million respectively,” says Rakuten Trade Sdn Bhd head of research Kenny Yee.

He believes foreign funds are set to return over the next three months. September marked the first month to register net foreign buying since GE14 in May.

Nonetheless, despite the potential return of foreign funds, Yee expects market volatility to persist, in line with the situation at regional markets.

The massive outflow of foreign funds since the change in Putrajaya stems from a few factors, including government policy uncertainties, the emerging market currency crisis led by the Turkish lira, US rate hikes and the heightened US-China trade spat.

In the case of the ringgit, it has weakened by 5.1% since GE14 to RM4.15 against the greenback, from RM3.95 on May 8.

While CIMB Investment Bank head of research (equities) Ivy Ng Lee Fang agrees that foreign interest in Malaysian equities has increased, she believes external and domestic uncertainties need to be resolved.

“We believe foreign investors will be keen to raise their exposure in Malaysia if the potential benefits from reforms start to flow through to the economy and corporate earnings,” Ng tells The Edge, adding that concerns over the US-China trade war also need to subside for a comeback to be sustained.

She stresses that the market wants more clarity from the new government and is looking forward to an investors’ conference next week for insights into Malaysia’s economic, social and political sustainability. “The market is looking for more clarity from various policies that the government plans to roll out, which include the mid-term review of the 11th Malaysia Plan, National Housing Policy 2.0, Felda White Paper, Industry 4.0 blueprint as well as Budget 2019.”

Ng says the Port Dickson parliamentary by-election will be another key event to keep an eye on.

Maybank IB Research head of research Wong Chew Hann says the downside risk to the FBM KLCI has narrowed after the year-to-date foreign net sell reversed 82% of 2017’s foreign net buy.

In a report, Wong points out that last month started on a subdued note with RM663 million worth of foreign net sell in the week commencing Sept 3 after US President Donald Trump proposed tariffs on an additional US$200 billion worth of Chinese imports. However, foreign investors turned net buyers by the time these tariffs were levied on Sept 18.

“We estimate that foreign shareholding [in the market at end-September] was largely unchanged from end-August’s 23.6%. During the month, the FBM KLCI was marginally down by 1.5%,” she says in a note.

Yee rates the stock market performance for the first nine months of the year as generally reasonable. “Though there were some constant downward revisions [on earnings], we still consider the first nine months to be reasonable except for the knee-jerk reaction post the GE14 results.”

Ng attributes the 0.2% dip in the FBM KLCI in the first nine months to the weaker share price performance of Telekom Malaysia Bhd, Axiata Group Bhd, MISC Bhd and other heavyweights.

“While it saw a drop in performance, the FBM KLCI has performed relatively well compared with regional markets due to concerns over external factors, which include the US-China trade war as well as monetary tightening.”

Ng echoes Yee’s view that corporate earnings have generally underperformed market expectations in the first half, but sees encouraging prospects in the oil and gas sector going forward on the back of rising crude oil prices. Crude has risen above US$86 per barrel compared with US$67 at the start of the year.

Looking ahead, CIMB Investment Bank’s equity research is projecting a 5% market earnings growth this year, and improving to 8% in 2019, with the banking sector being the key driver.

Yee, on the other hand, believes corporate earnings are likely to remain subdued due to the government’s kitchen-sinking activities, but agrees banks will spearhead the earnings increase next year with a growth of about 8.2%.

Earlier in the year, Rakuten Trade set a 1,960 target for the benchmark equity index based on a projected earnings growth of 8.9%. Following some downgrades, especially to the plantation sector, the first completely online broker in Malaysia reduced the target to 1,860 on an earnings growth of 4.7%.

The downgrades are also reflective of the share price movement of the FBM KLCI. It has been a volatile year so far for the benchmark index, slumping to a low of 1,663.86 post-GE14 before buying support from local institutions ramped it up by almost 10%.

Meanwhile, Maybank IB’s Wong is maintaining her year-end target at 1,800, with top buys being Genting Bhd, Malaysia Airports Holdings Bhd, AMMB Holdings Bhd, Inari Amertron Bhd, Alliance Bank Malaysia Bhd, Cahya Mata Sarawak Bhd, Allianz Malaysia Bhd and YTL Hospitality REIT.

Most sectors are largely viewed as neutral by the research house, with the handful of positives being gaming (casino), oil and gas, and technology.

Wong is wary of the consumer sector because of its stretched valuations and expectations that sales will decelerate after the tax free period from May to August and the Sales and Services Tax 2.0 kicking in.

Telekom biggest loser among big caps, risks being removed from FBM KLCI

Telekom has lost some RM11.9 billion in market capitalisation this year — nearly half its worth — which could cost it a spot on the FBM KLCI in the upcoming November review. The telco is the worst performer thus far on the benchmark index.

“We will not at all be surprised should a corporate manoeuvre between Axiata [Group] and Telekom emerge,” Yee says, alluding to news reports earlier in the year of a potential merger. This was after Celcom Axiata Bhd’s CEO at the time, Michael Kuehner, commented that a merger between the two Khazanah Nasional Bhd-controlled telecommunications giants made sense.

Kuehner was replaced by Mohamad Idham Nawawi after his tenure ended in August.

Telcos, particularly fixed broadband operators, have come under pressure from the new Pakatan Harapan-led government to reduce fixed broadband prices, adding to their downside risk as earnings could be eroded.

Axiata Group trails its sister unit Telekom as the second worst-performing component stock, having lost 17.4% of its share value year to date.

Escalation of US-China trade tension the main external risk

Before Trump announced the US was prepared to slap tariffs on another US$257 billion worth of Chinese goods, most analysts and economists perceived his actions to be hard-line negotiation tactics to strike a deal with the Chinese.

But with the looming tariff on US$200 billion worth of goods, in addition to duties already imposed on US$50 billion of Chinese imports, the risk of a full-blown trade war has increased. In fact, most consider it a key external risk.

“The trade war may cause emerging market currencies like the ringgit to depreciate, spurring another, albeit smaller, round of foreign net selling,” Maybank IB’s Wong notes.

Huang Juin Hao, senior portfolio manager at Affin Hwang Asset Management, points to coming key events on the external front to keep a close watch on.

“Going forward, the key event that the markets are concerned about is the US mid-terms on Nov 6 when, according to the September polls, the Democrats have a double-digit lead and could capture the House from the Republicans.

“If the Democrats capture the House while the Republicans retain the Senate, this could impair Trump’s ability to pass legislation, possibly leading to a freeze in domestic fiscal policy. It could also register as voter disagreement over the trade tariffs and further escalation of the spat, which would then set the stage for a weaker US dollar and a slower pace of Fed rate hikes,” says Huang.

However, should the Republicans retain control of both House and Senate, this would be seen as an endorsement of Trump’s tax cuts and aggressive trade tariffs, and possibly lead to an accelerated pace of rate hikes and a stronger US dollar.

According to Huang, the outcome of the US mid-terms is important as it could prompt a last-minute review of the US-China trade spat, failing which the implementation of the full 25% tariff on US-China imports would start in January 2019. Even worse would be the escalation to encompass all imports from China.

“Given China’s position as the workshop of the world and as most of Asia’s key trading partner, this would have ripple effects on trade, supply chains and ultimately affect appetite for Asian equities,” Huang states.

Apart from heightened trade tensions, Rakuten’s Yee says the US market’s high valuations is another risk factor that could spill over into emerging markets, including Malaysia, in the event of a sharp decline.

“Wall Street will still be the main market determinant. It may also be the bane of global markets owing to its rich valuations and the upturn in interest rates,” he says.

Last Wednesday, the Dow Jones Industrial Average hit an all-time intraday high of 26,951.81 points while the S&P 500 closed at 2,925.51 — not far off its all-time intraday high of 2,940.91.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.