Bank stocks still offer hedge against inflation, says RHB IB

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According to RHB Investment Bank Bhd (RHB IB), it has maintained its “overweight” call on bank stocks as it believes banks still offer some degree of hedging against inflation despite rising recessionary risks. These stocks had recorded a modest 5% growth for year-to-date July 2022, retreating from an almost 10% gain between January 2022 and early May 2022. Still, Malaysian banks have fared relatively better than their regional peers in Singapore and Indonesia, which are down 7% and 5% respectively in US dollar terms. Malaysian banks would continue to outperform the broader market, offering decent earnings growth of 5% and dividend yields, while trading at an undemanding 1.0 times price-to-book value ratio. In terms of the net profit margin (NIM), the earlier and higher-than-expected overnight policy rate hikes should have a positive impact on banks’ NIMs in 2022-2023. Its calculations point to an about 2% uplift in financial year 2022 (FY22) sector earnings, with smaller banks expected to post stronger improvement of 3% to 5%, versus about 2% for large banks. Its economists expect Bank Negara Malaysia to raise interest rate by 25 basis points to 2.50% in September 2022, its third hike for the year. On loan growth, banks would sustain their loan growth in the second half of 2022 as the rebound in consumption and business activities from the depressed levels during the pandemic lockdown periods should see banks achieving their mid-single-digit loan growth for 2022. It projected the banking sector to see its earnings grow 5.4% in FY22, capped by Cukai Makmur (the Prosperity Tax). Overall, the domestic economic recovery, reopening of international borders, and special RM10,000 Employees Provident Fund withdrawal from April 2020 should sustain banks’ business momentum and support the delivery of another set of decent results for the second quarter of 2022. However, the recovery outlook was getting clouded, noting that with the Russia-Ukraine war likely to drag on for quite a while longer, global inflation had been made worse. Aggressive monetary tightening across the world would also exacerbate the risk of a recession. RHB IB expects gross domestic product growth to moderate to 4.5% in 2023 from 5.3% in 2022. 

Bursa Malaysia Derivatives inks MoU with the Shanghai Futures Exchange and Shanghai International Energy Exchange 

According to Bursa Malaysia Derivatives (BMD) CEO Samuel Ho, Bursa Malaysia Derivatives Bhd, the Shanghai Futures Exchange (SHFE) and the Shanghai International Energy Exchange (INE) have inked a memorandum of understanding (MoU) to strengthen existing business partnership. The MoU will commit the exchanges to share information and best practices pertaining to product development, market operations, and in the areas of common interest for all three markets. The signing of this MoU is a positive development that will lay the groundwork for a long-term relationship between Bursa Malaysia Derivatives, SHFE and INE. Aside from driving the growth of the ASEAN derivatives markets, this collaboration will indirectly support and contribute towards the China-Malaysia economic trade, given China’s position as Malaysia’s largest trading partner and rubber importer. BMD looks forward to working with SHFE and INE on the development of new products that will not only complement existing offerings, but will also meet the needs of increasingly sophisticated customers. Meanwhile, according to SHFE and INE CEO Wang Fenghai, the MoU between SHFE, INE and Bursa Malaysia Derivatives is the culmination of the three exchanges’ close friendship over the years. SHFE and INE are keen to collaborate with Bursa Malaysia Derivatives in order to learn while deepening mutual understanding of each other’s markets, and provide more risk management tools to investors. Currently, INE has attracted overseas investors from more than 20 countries and regions across six continents, including Asia, Europe, North America, South America, Africa, and Oceania. It also has the most international products than any other China commodity futures exchanges. 

RAM Ratings revises 2022 inflation forecast to 3% 

According to RAM Ratings, the rating agency has revised the inflation forecast for 2022 to 3% from 2.5% earlier. The revision reflected recent changes in subsidies and the price ceiling for key price-controlled food items, as well as a stronger-than-expected cost pass-through to consumers so far this year. The removal of subsidies for bottled cooking oil, as well as a higher price ceiling for food items like chicken and eggs had taken effect on July 1. It estimates these measures to lift headline inflation in the second half of 2022 (2H22) by approximately 0.3 percentage points. Food inflation already climbed to 5.2% in May 2022, compared to 3.2% in December 2021. Given the prolonged price pressures faced by businesses, more prevalent cost pass-through to consumers will also be inevitable in 2H22. The low base due to the Pemulih electricity tariff discount in the third quarter of 2021 will also push the overall inflation rate higher this year. While the government is currently considering alternative schemes for petrol subsidies, the current subsidies in place for RON95 petrol and diesel as well as electricity and water tariff would help to temper further inflationary pressures. These items collectively constitute close to 13% of the consumer price index (CPI) basket. Following the recent hike in the overnight policy rate to 2.25%, its updated projection is for the rate to end the year at 2.5%. Barring an unexpected economic slowdown, it expects the tightening cycle to continue in 2023, at a measured pace and quantum. 

Trading activity on Bursa to remain volatile – CGS-CIMB Research 

According to CGS-CIMB Research, it expects trading activity on Bursa Malaysia to remain volatile in 2H22 as market sentiment remains weak with potential further downside risks in 3Q22. That is as investors worry about corporate earnings and try to price in the peak of the interest rate cycle by the Federal Reserve (Fed) which is trying to engineer a soft landing of the American economy that is facing inflationary pressures. It noted the benchmark 30-stock FBM KLCI has fallen by 16% from its highs of 1,685 points in December 2020 after pricing in the earnings risks from a slowing global economy and political concerns and could go lower in the 3Q22 pricing in the next rate hikes by the Fed as well as lower commodity prices and higher costs due to rise in the minimum wage level. Thereafter, the market could be range-bound with potential upside if concerns over rate hikes or US recession risks subside and earnings risks for Malaysian corporates have been priced in. This could offer trading opportunities for investors looking for bargains in the stock market over the medium term. The research house lowered its earnings estimates for the FBM KLCI to reflect its earnings downgrade for Top Glove Corp Bhd and MR DIY Group (M) Bhd. It now projects the market benchmark’s earnings to fall 0.1% in 2022 and rise 10.7% in 2023. This lowers its end-2022 FBM KLCI target to 1,506 points (from 1,568 points), on unchanged 12.9 times target price-to-earnings (2.5 standard deviation below three-year mean). The research house advises investors to take shelter in sectors with defensive earnings (utilities, telco, healthcare, consumers) and high dividend yields. It also likes banks as beneficiaries of rising interest rates. It also noted the earnings of the FBM KLCI during the global financial crisis in 2008 fell by 8.7% due to the collapse in commodity prices and consumer sentiment before rebounding in 2009 while during the Covid-19 pandemic, earnings fell by 6.6%, due to a significant drop in demand caused by lockdown measures. Given the high inflation and rising risk of a US recession, there could be downside risks to its 2023 earnings growth forecast of 10.7%. On the assumption that FBM KLCI earnings reflect a similar degree of decline as during the global financial crisis (i.e. minus 8.7%) and Covid-19 (minus 6.6%), its FBM KLCI target falls to 1,213 and 1,245 points from the revised FBM KLCI target of 1,506 points.  

The research house’s analysis of past market downturns revealed that in four out of the past six downturn cycles since 1997, the FBM KLCI bottomed in the August to October period. The exception was during the dotCom bubble when the market bottomed in April and during the Covid-19 pandemic where it bottomed in March. Historically, during a market downturn period, the FBM KLCI corrected by 16% to 79% from its peak. The index has fallen by 15% from its recent peak of 1,685 points in December 2020, which means Bursa Malaysia is not in a bear market. To be in a bear market, the market needs to fall to 1,348 points or below. Investor sentiment and the market could get a lift from the return of foreign workers to worker-starved sectors and better-than-expected inbound tourist numbers. Easing inflationary pressure could also contribute together with the resolution to some of the environmental, social and governance concerns relating to forced labour, a market friendly Budget 2023, and additional liquidity at domestic institutional funds like the Employees Provident Fund following the end of the withdrawal schemes under stimulus packages announced in 2020, 2021 and 1H22 totalling around RM141bil. 

The 15th General Election (GE15) will be crucial as a more stable political environment post-GE15 could provide more clarity and certainty on policy direction on issues like 5G, foreign workers and construction projects which would help boost earnings visibility and investments and in turn attract liquidity into the equity market from domestic and foreign institutional investors. Sectors that tend to perform better against the market benchmark during past market downturns were consumer, technology, telco, healthcare and utilities suggesting investors best take shelter in utilities (Gas Malaysia Bhd, Malakoff Corp Bhd and Tenaga Nasional Bhd), telco (Telekom Malaysia Bhd), healthcare (IHH Healthcare Bhd), consumer (QL Resources Bhd, MR DIY and Genting Malaysia Bhd). The brokerage identified seven themes for 2H22, namely beneficiaries of the overnight policy rate hike cycle (RHB Bank Bhd, Hong Leong Bank Bhd, Public Bank Bhd, AMMB Holdings Bhd), beneficiaries of a weaker ringgit (IHH, PBB Group Bhd, Yinson Holdings Bhd). Other themes include high dividend yielders (Maxis Bhd, Gas Malaysia); beneficiaries of GE15 (Telekom, Maxis, Tenaga Nasional Bhd, Gamuda Bhd, Farm Fresh Bhd); value plays (WCT Holdings Bhd, SP Setia Bhd, UEM Sunrise Bhd, Star Media Group Bhd); ESG picks (Malayan Banking Bhd, AMMB) and ESG and syariah picks (MISC Bhd, Dialog Group Bhd, Maxis Bhd). The research house retains RHB Bank (target price of RM7.70), MR DIY (target price of RM2.40) and Genting Malaysia (target price of RM3.40) as its top three picks. 

Eye On The Markets 

This week, on Friday (15July), the Ringgit opened at 4.4475 against the USD from 4.4330 on Tuesday (12July). Meanwhile, the Ringgit was 3.1685 to the Sing Dollar on Friday (15July). On Tuesday (12July), the FBM KLCI opened at 1426.19. As at Friday (15July) 10:00am, the FBM KLCI is down 9.50 points for the week at 1416.69. Over in US, the overnight Dow Jones Industrial Average closed down 142.62 points (-0.46%) to 30,630.17 whilst the NASDAQ added 3.60 points (+0.03%) to 11,251.18.

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