No reprieve in sight yet for KLCI, says Maybank IB's research head

Thursday 25 Apr 2024

KUALA LUMPUR (July 4): The FBM KLCI, which has fallen 7.2% or 111.53 points to 1,437.52 since the beginning of this year, will continue to be under pressure as the benchmark index's prospects will be clouded by several headwinds.

Maybank Investment Bank Bhd's (Maybank IB) head of regional equity research Anand Pathmakanthan, who has cut his KLCI 2022 target to 1,500 level from an initial projection of 1,710 level, is expecting the outlook for the local equity market to continue to be challenging, given a confluent of headswinds — such as rising interest rate, inflation and the political overhang.

"I think those three issues will extend, which means the market will remain under pressure for a prolonged period and I don't see a rush [for the KLCI] to catch a bounce even at this level," Anand told reporters after Maybank IB's second half of 2022 (2H22) market outlook virtual briefing on Monday (July 4).

While Anand said the KLCI's current valuation appears "attractive", with price-earnings ratio of 13 times, he said the possibility of downgrades in corporate earnings in 2H22 is "extremely high".

"My outlook on foreign flows is that they will remain pressured. I think the commodity cycle has peaked. It will remain bullish, but perhaps not visit the same peaks we saw in the first half of this year and that means there is a lot of attraction of being in the Indonesian commodity space, and the Malaysian commodity space has really passed that peak.

"If you take away commodity futures and you are a foreigner, the other attraction Malaysia has is that it is a very old economy, low beta and defensive. But again, it is not that defensive six months down the road [given] we will have the same issues — inflation, interest rates, eroding demand — causing earnings downgrades. I think foreign flows remain very weak for the equity market. Even for fixed income, it could be quite challenging, given that our spreads with the US Treasuries have come up quite a bit," he added.

On local technology stocks, Anand recommended investors to accumulate tech stocks on its present weakness to ride on the sector's long-term growth prospects.

"So we think [stocks] like Inari Amertron Bhd, ViTrox Corp Bhd, Frontken Corp Bhd, Greatech Technology Bhd, these remain probably the best long-term growth stories in the KLSE, and we continue to buy them on weakness.

"We have been cutting our tech valuations, not our ratings — we're still 'buy' on the sector. There has been a lot of concern about tech [stocks], but globally tech stocks that have suffered the most are the ones that are not making money yet, [whose] profitability is many years into the future.

"Malaysian tech companies are very different. They have been profitable for years. They are arguably the best managed companies in Malaysia. They are, frankly, the sector that is truly exposed to global competition and run by extremely capable entrepreneurs.

"We cannot say that for many domestic focused sectors, which are shielded in many ways from competition. [Malaysian tech companies] remain profitable and they have very disciplined balanced sheets — almost all of them are in net cash.

"So, I always like to recommend tech stocks as good buys on any sell-off, [even] while we have been cutting our target prices, because of a very logical reason: As interest rates go up, discount rates for future earnings go up, and that reduces valuations.

"But you will notice that we still have a lot of tech stocks on our 'buy' list for the reasons I just mentioned. They provide the best return on capital of any sector in Malaysia, and they will continue to do so in our view," he added.

Meanwhile, Anand was "neutral" on the plantation sector as crude palm oil (CPO) price has peaked and is expected to normalise going forward. He is projecting CPO price to reach RM5,000 per tonne this year, and RM3,400 per tonne next year, compared with its peak of RM8,000 a tonne in March this year.

"Obviously we are looking at prices coming off going forward. A lot of it is [due to] palm oil output recovery. It has been squeezed for the last two years, most recently because of labour shortages as well. We do expect [palm oil output] to recover over the next 18 months.

"The other thing is what is happening in the competitive space. A big reason for the jump in CPO prices in the first half of this year was concern about supply alternatives, especially sunflower oil out of Ukraine.

"[But] what we are seeing now is relatively good weather in the northern hemisphere. [An increase in] soybean and sunflower oil supplies is going to result in a reduction in CPO price," he said.

In terms of the plantation sector's top pick, he preferred IOI Corp Bhd and Kuala Lumpur Kepong Bhd because they are integrated oil palm players.

"So if you are a pure CPO producer, you do great when CPO prices are going up. But you know it's a double-edged sword. You have the biggest earnings declines when CPO prices plunge," he added.

Edited ByTan Choe Choe

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