KUALA LUMPUR (Dec 7): The FBM KLCI is expected to breach the 1,700 level by the end of 2023 as valuations of local equities improve after the US Federal Reserve (Fed) completes its rate hike cycle, said MIDF Research of the benchmark index, which is presently hovering around the 1,477 mark.

"We are bullish, but cautiously bullish in that sense," said the research firm's head of strategy Syed Muhammed Kifni Syed Kamaruddin at a media briefing on Wednesday (Dec 7).

"Historically, KLCI traded at around 16-17 times PE (price-to-earnings), but now we are trading at around 14.6 times. We are projecting KLCI to move upward from its current level, to 1,700 level at the end of 2023, with a PE of 15 times," he said.

Syed Muhammed Kifni said the main driver to valuations will be Fed's pivot to a slower pace of rate hike as inflationary pressure eases next year.

Nonetheless, he cautioned that there are factors limiting the KLCI upside, namely the potential recession in the world's largest economy and an escalation of geopolitical conflict.

Based on historical data, Syed Muhammed Kifni said an economic recession is poised to happen in 12-24 months from the moment that short-term US Treasuries yield trends higher than that of longer-term peers, which was on Oct 26.

Hence, he suggested that investors enter the market now to take advantage of the improving sentiment amid Fed's pivot prior to a recession.
 
Moreover, he pointed out that corporate earnings growth is expected to gain further momentum as well, in the absence of the prosperity tax.

In terms of the overall Malaysian economy, MIDF's economist Abdul Mui'zz Morhalim said although slowing global growth may weigh on local economic activities, the country's gross domestic product is likely to remain supported by resilient domestic spending, albeit easing to 4.2% next year based on his projection, after posting 8% growth this year.

"Consumption will still see positive growth [in 2023], supported by the improving labour market and easing in supply chain constraints as raw material prices stabilise," said Abdul Mui'zz, who expects the unemployment rate to improve further to 3.5% in 2023 from 3.8% this year.

MIDF's head of research Imran Yassin Md Yusof agreed that Malaysia is not expected to fall into recession next year despite various external headwinds.

"Definitely we are not getting a recession. Our domestic demand is going to be a support. Unemployment rate is going to come down," he said, adding in Budget 2023, "we believe that a lot of rakyat-centric measures are going to stay, subsidies are going to be there, [and] inflation pressure will come down".

Earlier this week, Prime Minister Datuk Seri Anwar Ibrahim indicated that although the government would review Budget 2023 drafted by the previous administration, he also said that "most items are acceptable".

Imran Yassin forecast that Malaysia's consumer price index will ease to 2.3% in 2023, from 3% this year, while Bank Negara Malaysia will raise the overnight policy rate by another 25 basis points in another hike to 3% next year from 2.75% at present.

The analyst also expected oil prices to average US$96 (RM423.44) a barrel next year, and crude palm oil is seen to be at RM3,500 a metric tonne.

Imran Yassin said with Malaysia's current account surplus and resilient exports, the ringgit is also expected to improve further to an average of 4.3 in 2023, from an average of 4.38 this year.