KUALA LUMPUR (May 20): Barring any drastic corporate earnings revisions, the FBM KLCI is projected to close at about 1,400 points at the end of this year in view of heightened economic headwinds, according to Rakuten Trade Sdn Bhd head of research Kenny Yee.
In a virtual market outlook briefing today, Yee said the KLCI target is based on 15 times its market price-to-earnings ratio, and further downward estimates by analysts could be the main factor derailing the target.
He opines that the plantation sector may pose the biggest risk of being the Achilles heel for the downgrade, as current analysts' estimates are still projecting the sector earnings to record strong growth of around 40%.
"As we move down this year, I think expectations [on plantation companies] could be lowered and lowered; that could be the main road bumps for corporate earnings going forward," Yee said.
As for banks that hold the biggest weightage on the KLCI index, Yee thinks that the financial institutions could be poised for further downgrades given they are currently moving into a negative earnings phase, no thanks to the low-interest-rate environment and loan moratoriums.
Exuberance in the market
Given the resilient stock market performance, Yee sounded the alarm that the current equities market has outpaced actual fundamentals and he attributed this mainly to liquidity and active participation from retail investors.
"The retail participation has risen 62% to about 35% compared with the 2019 average of 22% and they have been playing a large part in sustaining the market momentum."
He expects that the brisk trading participation of retailers could go on for some time, as he observed in the past that retail participation had managed to surpass institutional participation at some point during the bull run in mid-90s that eventually ended fatally.
When asked about whether he expects a reversal in market trend, Yee said he expects there could be another dip in the stock market and it is largely subject to the US stock market performance, as he thinks that the current market performance is solely based on expectation rather than reality.
"I think we are currently entering a phase that there is more negative than positive, [and] to ignite another panic selling is not difficult at the moment, because of how the equity market has performed in the past few weeks, which is more liquidity-driven [but] without any fundamentals."
At this stage, Yee thinks that emergence of vaccines would be the main reason for a more solid footing in the stock market going forward.
As such, he advised investors to exercise extreme caution treading the stock market and hold back on greed.
In particular, Yee advised investors to avoid companies involved in big-ticket items such as property and motor vehicles as consumption for these categories would be hit hard during sluggish economic times.
In his observation, the business environment had not been rosy even prior to the outbreak of Covid-19, which prompted business owners to be more decisive in shutting down businesses at current predicament times.
Rakuten’s top five picks
Rakuten Trade favours ethanol manufacturer Ancom Bhd, medical cable producer Supercomnet Technologies Bhd, and LYC Healthcare Bhd that are involved in the medical landscape.
In addition, due to the strong surge in gold prices and the low interest rate environment, gold miner Bahvest Resources Bhd and non-bank financier RCE Capital Bhd, which specialises in the civil servant segment, are also among their top picks.