FBM KLCI seen hitting 1,580 points by year-end – Rakuten 

Inve$t | Market Sentiments | 14 October 2022

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According to Rakuten Trade head of research Kenny Yee Shen Pin, the FBM KLCI is expected to hit 1,580 points by year-end. The possibility of the US Federal Reserve lowering interest rate hikes will provide some stability for the regional and local bourses. He anticipates FBM KLCI to possibly touch 1,580 points by the end of 2022, premised on a very reasonable 13 times calendar year 2022 (CY22) price-to-earnings (PE) ratio. The banking and telecommunication sectors would support the momentum. This is also premised on the much improved earnings growth for CY23, at 6.8%. This is in view of better corporate performance, especially from the banking sector. 

Speaking at a briefing titled “A ‘wow’ Budget”, he said the construction sector will also likely play a significant role to improve the economy from the present slowdown. At the moment, corporate earnings are on a downtrend, with growth revised from 4.3% to about 1%. This was attributed to the cut in profit estimates for the manufacturing and utilities sectors. The manufacturing sector, particularly glove, saw an almost 90% slash in earnings. The banking sector is expected to have a 15% to 16% growth next year, in view of the current high interest-rate environment. 

The FBM KLCI is now trading at a PE of 11.5 times, below its five-year historical average of 18.4 times or a 40% discount. Regional valuations are also trading below their respective historical average. Although Budget 2023 holds no legality now given the Parliament’s dissolution on Monday, until the new government tables a new one, the budget covered the whole spectrum of the country’s population. 

In the last two or three budgets, there has been a lack of an injection of funds into the country’s main engine, which is the construction sector. This is crucial as the construction sector has the highest multiplier effect in terms of economic growth. Although its contribution to gross domestic product is not high, the construction sector has more than 100 linkages into other segments of the economy, from the upstream to downstream players. Therefore, it acts as a wealth creator for many industries. 

Market volatilities, primarily from the United States, remain a persistent headwind for Bursa’s performance. Commodities like crude palm oil (CPO) and crude oil have experienced wild gyrations. The price of CPO fell by about 47% to RM3,800 from a high of RM7,200, while Brent crude oil declined by more than 20% to US$96 (RM448.5) per barrel from US$130 (RM607.3) per barrel.  

Although foreign shareholding of shares is low, it is on an improving trend, backed by foreign net inflows which are currently at RM6.5bil. Foreign shareholding in the equity market as of September 2022 was at 12.4%. Following consecutive declines in 2020 and 2021, foreign shareholding actually touched the lowest at the end of 2021, at 11.35%. However, the situation has improved, underpinned by foreign net inflows so far this year. The Fed is expected to be less aggressive with interest rate hikes next year. This will likely strengthen the ringgit against the US dollar in the second half of 2023. He is of the belief that Bank Negara will implement another 25-basis-point hike in interest rates in order to stop the ringgit from weakening further. While regional market volatility remains high, Malaysia’s volatility is below its peers as the local bourse is a captive market. A large portion of the shares are held domestically and foreign shareholding is still at a low level. Hence volatility in the country is on a low side compared with regional peers. 

IMF ups Malaysia’s 2022 growth forecast to 5.4%, cuts 2023 projection to 4.4%, warns of global recession 

According to the International Monetary Fund (IMF) in its World Economic Outlook Report October 2022 released on Wednesday (Oct 12), it has raised its gross domestic product (GDP) growth forecast for Malaysia in 2022 to 5.4% from 5.1%. At the same time, the fund cautioned that for the global economy in 2023, worse is to come. It also projected that Malaysia would grow at 4.4% next year, lower than its initial forecast of 4.7% in July. The revision upwards for 2022 comes less than three months after the IMF in July cut its projected 2022 growth for Malaysia to 5.1% from 5.6%. The IMF’s projection is lower than Malaysia’s official forecast growth of 6.5%-7.0%. 

The IMF also downgraded 2023 global economic growth to 2.7% from 2.9%  in its July forecast, with a 25% probability that world GDP would fall below 2%. It cautioned that more than a third of the global economy would contract this year, and in 2023, the three largest economies — the US, EU and China — would continue to stall. In short, the worst is yet to come, and for many people, 2023 will feel like a recession. The global economy continues to face steep challenges, due to lingering effects from the Russian-Ukraine war, persistent and broadening inflation pressures and economic slowdown in China. 

IMF foresees that global inflation may escalate to 8.8% this year, from 4.7% in 2021, before tapering to 6.5% in 2023 and 4.1% by 2024. Upside inflation surprises have been most widespread among advanced economies, with greater variability in emerging markets. As storm clouds gather, policymakers need to keep a steady hand. The fund also highlighted that the sharp appreciation of the US dollar adds price pressure to emerging markets, which are already facing a very challenging external environment as capital flows have not recovered and many low-income economies remain in debt distress. The 2022 shocks will re-open economic wounds that were only partially healed following the pandemic. 

Eye On The Markets 

This week, on Friday (14Oct), the Ringgit opened at 4.6945 against the USD from 4.6660 on Tuesday (11Oct). Meanwhile, the Ringgit was 3.2982 to the Sing Dollar on Friday (14Oct). On Tuesday (11Oct), the FBM KLCI opened at 1400.58. As at Friday (14Oct) 10:00am, the FBM KLCI is down 17.33 points for the week at 1383.25. Over in US, the overnight Dow Jones Industrial Average closed up 827.87 points (+2.83%) to 30,038.72 whilst the NASDAQ gained 232.05 points (+2.23%) to 10,649.15. 

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