KUALA LUMPUR (Sept 14): Following the consolidations seen recently, Rakuten Trade Sdn Bhd expects the FBM KLCI to trade higher going forward and forecasted it to close at 1,580 points by end of 2020. 

The research house said the year-end target was based on 15.5 times its calendar year 2021 (CY21) price-to-earnings ratio (PER). At the noon break, KLCI was up 1.18% or 17.55 points at 1,507.67. From end-July, the FBM KLCI has declined by 6% from 1,603.75.

"Following the market consolidation, I think ... the continued interest in glove counters should be positive to the market,” its head of research Kenny Yee said at a virtual media briefing on market outlook for the fourth quarter of this year.

He expects the rubber glove sector will continue to be in the limelight as the world remains shrouded by Covid-19 fears this year with new coronavirus cases continuing to rise globally. 

Also, he expects the ample liquidity will remain the fuel for the market's upward momentum for the next few months, especially from retail participation. 

“The rubber gloves fever has played a large part in enticing the retail investments [into the local bourse]. This coupled with the low interest regime and sudden surge of interest in equity trading among the younger generations, has also enhanced the liquidity in the stock market," he said.

In terms of fund flow, retail investors hit its highest inflow this year so far in the month of July with RM2.05 billion funds flowing into the equity market, up significantly from fund inflows of RM1.25 billion recorded in June. 

Year-to-date (YTD), the retail investors recorded the biggest fund inflow with RM11.18 billion, against the inflow of RM9.77 billion by local institutional investors. 

While the foreign funds have sold almost RM21 billion during the same period, the shareholding is at a multi-year low of 12.1% from 20% in 2017. On a positive note, Yee said the remaining foreign shareholding on Bursa Malaysia depicts low possibility of another massive net outflow.

When asked if the expiry of the six-month loan moratorium in end-September will have any significant impact on the market, Yee said he does not foresee this event to have a major impact on the market as he expects retail investors will continue to drive the buying momentum on the local bourse. 

Retail investors participation on the local exchange has been rising this year so far and has reached its peak in August at 43.18%, up from its March low of 25.97%.

Overall, he noted that retail participation has risen by 132% compared to the average in 2019. As a result, the average daily trading volume currently seen in the local bourse averaged about 7 billion shares, higher compared from 2.5 billion shares last year. 

Going forward, Yee believes the rotational play will continue on Bursa. Besides the rubber glove sector driving the market, Yee is also positive on the construction and plantation sectors providing support to the local bourse. 

“Although we have not seen any interest on these two [sectors], going forward once the news flows on projects and contracts rolling out [start], that should see more participation in the construction sector.  

“For plantation, the continued spat between the US and China will only spur China to purchase palm oil rather than [soybean oil]. This should be a positive catalyst for CPO prices,” Yee added. 

YTD, both the Bursa Construction Index and Plantation Index were down by 24% and 9.3% respectively. As at last Friday, the Construction Index closed at 159.04 points from 209.20 on Dec 31, 2019, while the Plantation Index closed at 7,007.88 points against 7,733.37 points. 

On the corporate earnings growth front, Yee, however, sees it contracting by 20.6% (down from a previous forecast of -3.9%), mainly dragged down by the banking sector's negative performance.

However, he expects the corporate earnings to rebound strongly in 2021, forecasting a growth of 35.3% (up from 14.2% growth previously), driven by growth in the manufacturing sector, particularly in rubber glove manufacturers. 

As such, he believes the FBM KLCI will be spurred by improving earnings growth and should test the 1,670 level in 2021, which is premised on 16.5 times CY21 PER. 

Rakuten Trade's top fundamentals picks are integrated system company office furnishing provider AHB Holdings Bhd, engineering solutions provider D’nonce Technology Bhd, and Supercomnet Technologies Bhd (Scomnet), a manufacturer of wires and cable for medical devices, electrical appliance, consumer electronics and automotive markets. 

All three stocks are deemed to be beneficiaries of the Covid-19 era. 

For AHB, Rakuten Trade said its latest products, namely “Covid Panels” and “SpaceCom Medical Hubs”, are set to benefit from the new normal within the office space and medical hubs. It anticipated the group is likely to achieve record earnings in FY21 as demand for these products is set to swell since we are entering the Covid-19 prevention era. 

Similarly, the research house expects D’nonce to achieve record earnings in FY21, as the group's packaging boxes are used by major glove manufacturers. 

On Scomnet, it said its medical cables will see robust earnings growth on the back of improved demand amidst the Covid-19 pandemic. It expects the group to deliver its strongest-ever performance on record with supercharged growth in earnings per share of +59% in FY20 and +68.3% in FY21.