Healthier outlook seen for construction industry – Kenanga Research

INVE$T | Market Sentiments

09 September 2022

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According to Kenanga Research, the Malaysian construction industry is poised for improved earnings in the second half of 2022, given the gradual return of foreign workers and the recent easing in base metal prices. It is reiterating an “overweight” call on the sector, believing that the worst is over. Since the end of June, certain key building material prices, such as steel and aluminium, have come off substantially due to the intermittent lockdowns in China. So are diesel and bitumen on the back of weaker oil prices. Meanwhile, most new contracts being negotiated would have priced in the current market prices (which are higher) and have an element of price variation built in, to protect the contractor’s margins in the event of huge swing in material prices. Overall margins should gradually improve, as the low-margin old jobs tail off and the new projects adjusted for higher input costs start to contribute.  

Construction counters under the research house’s coverage saw marginal deterioration in the second quarter of this year. Gamuda Bhd was the only company that beat stronger-than-expected property and construction margins. While on the disappointing end is WCT Holdings Bhd, which saw a weak contribution from its property unit as it struggled to cover overhead costs. Kerjaya Prospek Group Bhd was affected by slower billings on labour shortages.  

The margins realised by most contractors in the first half of 2022 were still below the pre-Covid levels, due to the soaring costs of building materials, particularly steel and labour shortages that hampered work progress. Gamuda is the exception, which saw construction margins stronger than pre-Covid levels due to cost savings recognition from its MRT2 project, which is coming to an end. Amid a slow job market, year-to-date, IJM Corp Bhd and WCT have yet to secure any new work packages. Similarly, Kimlun Corp Bhd and Sunway Construction Group Bhd are trailing their replenishment targets. Consequently, orderbook levels of most players are depleting. However, it foresees better job replenishment prospects with the imminent rollout of MRT3 and Pan Borneo Highway (Phase 2). As multinational companies diversify their manufacturing bases geographically (away from China) to de-risk, there are opportunities in the construction of new semiconductor plants and data centres locally. 

Asean PMI data shows business improvement – S&P Global 

According to S&P Global Market Intelligence economist Maryam Baluch, the Purchasing Managers’ Index (PMI) data for August 2022 signalled an eleventh monthly improvement in business conditions across the Asean manufacturing sector. In its Global Asean Manufacturing PMI report, growth was supported by quicker upturns in production levels and new factory orders. The headline PMI posted at 52.3 in August, up from 52.2 in July, marking eleven months of expansion, with the latest reading indicating a solid improvement in the health of the Asean manufacturing sector. 

For Malaysia, while the headline PMI figure was posted above the neutral 50 threshold for the fifth month running at Malaysian manufacturers (50.3), the pace of increase softened from July and signalled only a marginal improvement in operating conditions. In Singapore, six of the seven constituents recorded improvements in operating conditions in August with the country registering the quickest upturn, and for the ninth month running. That said, the rate of increase (56.8) softened from the survey high observed in July to the weakest since March. 

Mild growth was noted at Indonesian manufacturers, thereby extending the current run of increase to 11 months. At 51.7, the rate of increase was the quickest in four months. Similarly, at 51.2, the Philippines also reported an improvement in business conditions. Looking ahead 12 months, manufacturing companies remain hopeful of expansion in output. Sentiment improved for the third month running with the degree of confidence the highest since November 2016. 

The August data signalled yet another modest expansion across the Asean manufacturing sector. Data suggested that higher production volumes and intakes of new orders resulted in firms raising employment and inventories. Supply-side and inflationary pressures eased during the latest survey period. Lead times lengthened at the slowest pace in 23 months, while input price inflation eased to the weakest in six months. Firms will hope these trends continue. Overall, client appetite across Asean nations remained strong. However, interest rate hikes will likely challenge demand in the coming months. 

Eye On The Markets 

This week, on Friday (9Sept), the Ringgit opened at 4.4975 against the USD from 4.4880 on Monday (5Sept). Meanwhile, the Ringgit was 3.2068 to the Sing Dollar on Friday (9Sept). On Monday (5Sept), the FBM KLCI opened at 1492.03. As at Friday (9Sept) 10:00am, the FBM KLCI is up 5.78 points for the week at 1497.81. Over in US, the overnight Dow Jones Industrial Average closed up 193.24 points (+0.61%) to 31,774.52 whilst the NASDAQ up 70.23 (+0.60%) to 11,862.13. 

Foreign capital inflows to bolster market – Rakuten

INVE$T | Market Sentiments

2 September 2022

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According to Kenny Yee, head of research at Rakuten Trade, the benchmark FBM KLCI is expected to be at the 1,600 to 1,650 level by year’s end due to increased foreign capital inflow and improved corporate results. The growth momentum is anticipated to continue into the following year, with the barometer index likely to be more stable than it was this year. The net inflow of foreign funds has already reached RM8bil following the introduction of Rakuten Trade’s currency facility here. It is a plus point since volatility is still low in Malaysia compared to the region. Next year will be even smoother with much better corporate earnings. For this year, even though there was still uncertainty in the market, coupled with the implementation of the prosperity tax (Cukai Makmur), the corporates had managed to record good earnings growth. Saying to watch out for next year as it’s going to be much better as the inflationary pressure is still not as bad as in the developed countries. Over the short term, the Ringgit is still on the weak side. However, it is only weakening against the US dollar, whereas against the region’s currencies it is strengthening. However once the US Federal Reserve has eased its quantitative tightening, then the Ringgit may rebound. 

Tech stocks are currently “sexy” but his personal preference is banking stocks, real estate investment trusts and telco counters. The healthcare sector, especially rubber glove companies, still has a lot of uncertainty adding that fundamentally, things are still not that positive.  

Meanwhile, the brokerage has launched its enhanced foreign market service that includes the benefits of a FX facility. Investors can now convert funds between the ringgit and the US dollar via its app and web platform. Conversions are made in real-time, at competitive rates and with no additional FX charges imposed on inter-currency trades. With the rollout, investors can now trade in either the ringgit or the US dollar at low brokerage rates of RM7 to RM100 or US$1.88 to US$25, respectively.  

According to Rakuten CEO Kazumasa Mise, almost 25,000 US trading accounts have been activated through Rakuten Trade since the service was first introduced in January and it has also served as a catalyst for new investors to test trading strategies on Bursa Malaysia before diversifying onto the US markets. To date, more than 85% of Rakuten Trade’s clients trade first on Bursa Malaysia before going into US markets. The brokerage continues to record strong and steady trading growth on the New York Stock Exchange and Nasdaq. 

Foreign fund inflows continued for sixth consecutive week – MIDF Research 

According to MIDF Research, Bursa Malaysia continued to see foreign fund inflows for the sixth consecutive week for the week ended Aug 26, although at a much more moderated pace, with an inflow of RM355.1 million compared with the net inflow of RM615.5 million in the previous week. Malaysia was among five Asian exchanges which were in the positive region last week. Strong inflows were seen in South Korea (US$463.7 million), India (US$405.8 million), Thailand (US$259.5 million) and Indonesia (US$119.5 million).  

In its weekly Fund Flow Report, the research house that said foreigners were net buyers on every trading day last week except on Wednesday, where they disposed of RM90.5 million worth of equities, while local institutions remain as net sellers. Foreign investors were net buyers on Monday (RM56.2 million) and Tuesday (RM14.2 million), and on Thursday (RM193 million) and Friday (RM71.7 million), respectively. However, local institutions remained net sellers for the seventh consecutive week at RM286.2 million. They have been net sellers for every trading day since Aug 3 before briefly turning into net buyers on Wednesday (Aug 24) at RM24.3 million. They were net sellers on Monday (RM92.4 million), Tuesday (RM40.4 million), Thursday (RM114.3 million) and Friday (RM63.5 million). Meanwhile, local retailers maintained their net buying spree for the third consecutive week at RM41.7 million. They bought RM128.6 million net from Monday to Wednesday before net selling RM87 million over the next two days.  

To date, international funds have been net buyers in Bursa Malaysia for 23 out of the 34 weeks of 2022, with a total net inflow of RM7.97 billion. Local retailers have been net buyers for 22 out of 34 weeks of 2022 at RM1.8 billion year-to-date. On the other hand, local institutions were net sellers for 27 out of 34 weeks, with a total net outflow of RM9.76 billion. In terms of participation, there has been a decline in average daily trade value (ADTV) across the board, led by local institutions (-8.9 per cent), retailers (-2.97 per cent) and foreign investors (0.9 per cent). 

Eye On The Markets 

This week, on Friday (2Sept), the Ringgit opened at 4.4845 against the USD from 4.4740 on Monday (29Aug). Meanwhile, the Ringgit was 3.2001 to the Sing Dollar on Friday (2Sept). On Monday (29Aug), the FBM KLCI opened at 1486.52. As at Friday (2Sept) 10:00am, the FBM KLCI is up 3.82 points for the week at 1490.34. Over in US, the overnight Dow Jones Industrial Average closed up 145.99 points (+0.46%) to 31,656.42 whilst the NASDAQ shed 31.08 (-0.26%) to 11,785.13. 

Malaysia’s leading index up 5.3% y-o-y in June 2022, signals economic growth confidence – DOSM 

Inve$t | Market Sentiments

26 August 2022

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According to the Department of Statistics Malaysia (DoSM), Malaysia’s leading index (LI) rebounded 5.3 per cent year-on-year to 111.7 points in June 2022 after a rise of 2.3 per cent in May 2022 (111.3 points). The increase was mainly backed by the increment in real imports of other basic precious and other non-ferrous metals driven by the import of platinum-based metals and influenced by the low base effect from the previous year (June 2021: 106.1 points). Concomitantly, the monthly change of LI increased 0.4 per cent in the reference month attributed mainly by real imports of other basic precious and other non-ferrous metals (0.6 per cent) and the number of new companies registered (0.6 per cent).  

In June 2022, the LI which shows the ability to anticipate the future direction of the economy, signals confidence towards further growth in the coming months through smoothed long-term trend index movements that are intact above 100.0 points. This is in line with the anticipated promising signs of strong domestic and export demand as well as the reopening of international borders amid slow global economic growth.  

For the current economic scenario, the coincident index (CI) spiked 12.6 per cent y-o-y to record 121.5 points in June 2022 in tandem with the economic performance in the second quarter of this year where strong growth was recorded in June 2022. Furthermore, the CI registered 0.2 per cent month-on-month led by the increases in industrial production index (0.9 per cent), capacity utilisation in the manufacturing sector (0.7 per cent) and total employment in the manufacturing sector (0.2 per cent). The diffusion index for LI recorded 42.9 per cent in June 2022. At the same time, the diffusion index for CI remained at 100.0 per cent since December 2021 representing that all the CI components increased over the past six months. The full publication of the Malaysian Economic Indicators: Leading, Coincident & Lagging Indexes, June 2022 can be downloaded through eStatistik portal. 

Foreign buying of Malaysian equities rose 36% to RM615.5m last week – MIDF 

According to MIDF Research, foreign buying of Malaysian equities rose 36% week-on-week to RM615.5 million for the week ended Aug 19, from RM451.69 million the prior week. In its weekly fund flow report on Monday (Aug 22), the MIDF Research team noted that last week saw net buying activities by foreigners for every trading day. The amount of net inflows recorded was RM120.4 million last Monday, RM163.9 million last Tuesday, RM153.3 million last Wednesday, and RM132.7 million last Thursday. Friday was also a net buying day, but at a lower rate of RM45.2 million. 

Local institutions continued to be net sellers every day last week, with a total net weekly outflow of RM675.9 million. Last Tuesday saw the highest net money outflow of RM193.1 million. To note, local institutions have been net sellers for 13 consecutive days since the week ended Aug 3. Local retailers remained as net buyers for the second consecutive week, with a total net inflow of RM60.4 million. They were net buyers last Monday to Wednesday but turned net sellers last Thursday and Friday.  

To date, international investors were net buyers for 22 out of 33 weeks of 2022, with a total net inflow of RM7.72 billion. Local institutions were net sellers for 26 out of 33 weeks, with a total net outflow of RM9.48 billion. Local retailers were net buyers for 21 out of 33 weeks of 2022. Year-to-date, they have net bought RM1.76 billion. In terms of participation, there was an increase in average daily trade value among all investor classes, with retail investors at 21.3%, institutional investors at 20.7%, and foreign investors at 11.7%. 

Eye On The Markets 

This week, on Friday (26Aug), the Ringgit opened at 4.4740 against the USD from 4.4850 on Monday (22Aug). Meanwhile, the Ringgit was 3.2179 to the Sing Dollar on Friday (26Aug). On Monday (22Aug), the FBM KLCI opened at 1501.61. As at Friday (26Aug) 10:00am, the FBM KLCI is up 3.76 points for the week at 1505.37. Over in US, the overnight Dow Jones Industrial Average closed up 322.55 points (0.98%) to 33,291.78 whilst the NASDAQ added 207.74 (1.67%) to 12.639.26. 

Weakening ringgit attracting foreign property investors – Juwai IQI 

INVE$T | Market Sentiments

19 August 2022

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According to real estate technology group Juwai IQI co-founder and group chief executive officer Kashif Ansari, the weakening ringgit, which has lost more than 6% of its value against the US dollar so far this year, has been luring foreign investors back into the Malaysian property market. Foreign investors have benefited from exchange rate trends with the ringgit falling 13% from its 2018 high against the greenback. Citing data from the Ministry of International Trade and Industry (MITI) that foreign direct investment has been strong, and the country attracted RM27.8 billion in the first quarter of 2022.  

The manufacturing sector accounted for the majority of investment, which will increase capacity and allow Malaysia to capture additional market share. Malaysia is benefiting from the commodities boom, higher exports, strong foreign direct investment, and the recovery in domestic demand. Inflation is expected to peak this year at 3.2%, before falling to 2.8% in 2023.  

Bank Negara Malaysia (BNM) has begun tightening the overnight policy rate in May this year and had since moved the rate up to 2.25%, from an accommodative rate of 1.75%, and the country’s banks had moved in lockstep, pushing the base lending rate up to 5.9% per annum. While these moves represent an increase from the extraordinarily low levels that prevailed for the past two years, interest rates remain historically low. He believes the economy and property market have enough momentum to absorb the increases in stride, without falling into a downcycle. Malaysia’s real gross domestic product (GDP) growth is expected to reach 5.7% in 2022. 

GDP momentum to remain positive this year – Outlook remains favourable despite headwinds – AmBank Group 

According to AmBank Group chief economist Anthony Dass, Malaysia’s economy is projected to grow at 5.7% to 6.5% this year, with at least another 25 basis point (bps) hike in the overnight policy rate (OPR) amid higher inflationary pressures. The projection of gross domestic product (GDP) growth is higher than Bank Negara’s forecast growth range of 5.3% to 6.3% for the year despite headwinds. The GDP growth projection is revised upwards for this year and the base case GDP growth target for 2022 is now 6.4%, up from 5.6% previously. Despite some headwinds, the overall momentum is expected to remain positive in 2022. This is reflected in the healthy loan growth of 5.6% year-on-year (y-o-y) as at end-June 2022, where business loans grew by 5.3% y-o-y and consumer loans by 5.9% y-o-y.  

The leading indicator also suggested the potential outlook remains favourable, reading at 111.2 (May’s reading). The AmBank Group has baked in another 25 bps OPR rate hike in September with a probability of 40% for another 25 bps in November, supported by healthy potential incoming data that reflects a pick-up in demand pressures. The second quarter (2Q22) GDP grew better than expected, up 8.9% y-o-y, bringing the average first half of the year (1H22) GDP to 6.9% y-o-y. After growing by 5% y-o-y in the first quarter, 2Q22 growth exceeded the 7% median forecast of Bloomberg polled analysts.  

On a quarter-on-quarter (q-o-q) basis, the economy grew by 1.7% in 2Q22 versus a contraction of 3.0% q-o-q in 1Q22. 2Q22’s growth rate is the best performance in this region. Singapore grew by 4.4%, Indonesia by 5.4%, Vietnam by 7.7%, and the Philippines by 7.4% in the same quarter. Following the strong 1H22 performance, 2H22 GDP is also expected to perform well, part of which would be supported by the low base in 2H21. Besides the low base, the economy is expected to continue to benefit from strong export earnings backed by firm commodity prices, a healthy global semiconductor environment, resource-based exports and foreign direct investment inflows.  

But the upside to the economy is being contained by shortages of foreign workers at the entry level and talents. Businesses are struggling to cope with existing orders. To add fuel to the fire, they are also hurt by supply chain disruptions and high costs. As a result, the country is losing new orders to neighbours like Vietnam and Indonesia. We can expect some degree of knock-on impact from the ongoing geopolitical risks and uncertainties on the external front with a growing risk of a slower global GDP and trade in 2022. 

Foreign investors continued Bursa buying spree for fourth consecutive week – MIDF Research 

According to MIDF Research in its weekly Fund Flow Report, foreign funds maintained their net buying stance on Bursa Malaysia for the fourth consecutive week, which saw a net inflow of RM451.7 million for the week ended Aug 12, 2022. This was 16.4 per cent higher than the RM388.21 million of net buying seen the previous week. The week started with foreign funds net buying on Monday and Tuesday, amounting to RM530,000 and RM15.8 million respectively. 

Despite the concerns of US inflation on Wednesday, foreign funds net sold only minus RM3.8 million. This was the only day of net selling by foreigners. The bulk of the net buying happened on Thursday and Friday at RM232.9 million and RM206.2 million respectively after the release of lower than expected US inflation data and stronger than expected Malaysia gross domestic product (GDP) data. Local institutions continued to be net sellers for the fifth week, at a rate of minus RM573 million, more than double the amount from the previous week, which was negative RM266.9 million.  

Meanwhile, local institutions have been net sellers for eight consecutive trading days since Aug 3. Local retailers reversed their net selling trend over three weeks with a net buy of RM121.3 million for the week. They were net buyers from Monday to Wednesday and on Friday but were net sellers on Thursday. To date, international funds have been net buyers for 21 out of the 32 weeks of 2022, with a total net inflow of RM7.11 billion. Local institutions were net sellers for 25 out of 32 weeks, with a total net outflow of minus RM8.8 billion. Local retailers have been net buyers for 20 out of 32 weeks of 2022. Year-to-date, they have been net buyers at RM1.7 billion. In terms of participation, there was an increase in the average daily trade value (ADTV) among local institutional investors by 1.05 per cent. Reductions in ADTV were seen among foreign investors and local retailers by negative 3.57 per cent and negative 3.36 per cent respectively. 

Eye On The Markets 

This week, on Friday (19Aug), the Ringgit opened at 4.4800 against the USD from 4.4455 on Monday (15Aug). Meanwhile, the Ringgit was 3.2298 to the Sing Dollar on Friday (19Aug). On Monday (15Aug), the FBM KLCI opened at 1506.42. As at Friday (19Aug) 10:00am, the FBM KLCI is up 11.35 points for the week at 1517.77. Over in US, the overnight Dow Jones Industrial Average closed up 18.72 points (+0.06%) to 33,999.04 whilst the NASDAQ added 27.22 points (+0.21%) to 12,965.34.

Seven Malaysian companies make it to Forbes Asia’s Best Under A Billion 2022 list 

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Seven Malaysian companies have made it to the Forbes Asia’s Best Under A Billion 2022 list. The annual list highlights 200 Asia-Pacific public companies with less than US$1 billion in sales and consistent top- and bottom-line growth. The seven Malaysian companies are CE Technology, D&O Green Technologies Bhd, Greatech Technology Bhd, Kim Loong Resources Bhd, Tashin Holdings Bhd, UG Healthcare and ViTrox Corp Bhd. 

In the list released on Tuesday (Aug 9), Forbes said that as Covid-19 restrictions ease across the Asia-Pacific and people adapt to the new normal, this year’s annual Best Under A Billion list highlights the shift to discretionary spending. It said while healthcare and pharmaceutical-related companies were standouts last year, the post-pandemic return to daily life has benefitted apparel makers, mall operators, restaurants, consumer electronics and entertainment companies, among others. Forbes said this year’s list includes 75 returnees from the prior year, reflecting their resiliency in a fast-changing environment. 

Methodology – Forbes said the list is meant to identify companies with long-term sustainable performance across a variety of metrics. From a universe of 20,000 publicly traded companies in the Asia-Pacific region with annual sales above US$10 million and below US$1 billion, these 200 companies were selected. The companies on the list, which is unranked, were selected based on a composite score that incorporated their overall track record in measures such as debt, sales and earnings-per-share growth over both the most recent fiscal one- and three-year periods, and the strongest one- and five-year average returns on equity. 

Aside from quantitative criteria, qualitative screens were used as well, such as excluding companies with serious governance issues, questionable accounting, environmental concerns, management issues or legal troubles. State-controlled and subsidiaries of larger companies were also excluded. The criteria also ensured a geographic diversity of companies from across the region. 

The list uses full-year annual results, based on the latest publicly available figures as of July 11, 2022. 

Source: Forbes Asia

Malaysia’s Firming Economic Recovery Allows for Recalibration of Policy Support – AMRO 

According to the ASEAN+3 Macroeconomic Research Office (AMRO) in their 2022 Annual Consultation Report on Malaysia, the Malaysian economy is recovering strongly from the COVID-19 disruptions in 2021 and early 2022. The report was based on AMRO’s virtual Annual Consultation Visit to Malaysia in January – February 2022, and data and information available up to April 29, 2022.  

Protected by its high vaccination rate, continuing nationwide inoculation program, and adequate healthcare capacity, Malaysia has progressively reopened its economy despite the resurgence of infections by the Omicron variant in early 2022. Economic growth should firm up further with the country’s transition to the endemic phase of COVID-19 from the beginning of April. In this respect, accommodative policy settings can be recalibrated to build more buffers against future shocks and safeguard financial stability.  

Economic developments and outlook 

The economy is on track to expand by 6.0 percent in 2022 after growth firmed up in Q1 on the back of a strong rebound in private consumption and buoyant exports. Headline inflation is set to increase moderately to 3.0 percent in 2022 from 2.5 percent in 2021, reflecting the partial pass-through of higher global food and energy prices to consumer prices.  

Robust trade, strong foreign investment inflows, and an SDR allocation from the IMF, have allowed Bank Negara Malaysia (BNM) to build up its reserves buffer in 2021. The improvement in the reserves position has strengthened BNM’s capacity to withstand volatility shocks in capital flows.   

Risks and vulnerabilities 

COVID-19 remains a serious threat to the economic recovery. Although a tail-risk, the emergence of more virulent vaccine-resistant COVID-19 variants could once again prompt stringent mobility restrictions if a surge in cases risks overwhelming the healthcare system. At the same time, the economic outlook is shrouded by a new set of headwinds. The war in Ukraine and a more aggressive monetary policy tightening by the United States and the European Union have exposed Malaysia to the risks of higher inflation and a global economic slowdown. Heightened inflationary pressures could persist due to prolonged disruptions in global supply chains. Meanwhile, aggressive monetary policy tightening in the U.S. and E.U. amidst the ongoing war in Ukraine, could trigger a slump in global demand, including for Malaysia’s exports. 

Aggressive rate hikes by the U.S. Federal Reserve also present financing challenges to the Malaysian economy as bond yields rise in tandem with the U.S. bond yields. On a positive note, the strong earnings recovery, larger cash buffers and lower leverage particularly for larger corporates provide comfort that corporate sector balance sheets would remain robust against increasing refinancing costs.  

Policy recommendations  

While supportive fiscal policy remains critical to narrow the disparity across sectors, a faster pace of fiscal consolidation over the medium term is warranted to safeguard fiscal sustainability. AMRO welcomes the increase in expenditure in the 2022 budget, with more targeted support to vulnerable groups and greater allocation to development expenditure, while lowering the fiscal deficitto-GDP ratio. As the recovery becomes more firmly entrenched, tax reforms—especially with regard to indirect taxes—could be implemented, starting in 2023, to boost fiscal revenue and facilitate a faster reduction of the high debt-to-GDP ratio.  

BNM has started to normalize monetary policy, a welcome move given the strong rebound in economic activity and elevated global inflationary pressures. The policy rate, which was raised from a record low, has scope to increase further as the output gap continues to narrow and inflation continues to rise. Meanwhile, the gradual phasing out of the loan relief schemes in 2022 comes at an appropriate time as business and labor market conditions continue to improve. Loan impairments could emerge as a result, but the banks should be able to withstand the credit losses given their ample buffers and pre-emptive provisioning.  

Lastly, proactive initiatives to facilitate foreign direct investments and to mitigate the impact of climate change are highly commendable and should be sustained to propel the economy to a progressively more sustainable path. It would be critical to ensure the timely realization of investment commitments while strengthening workforce upskilling programs and the domestic financing ecosystem. At the same time, stepping up disaster preparedness and speeding up the implementation of policies that incentivize the shift to low-carbon domestic activities would place Malaysia on a strong footing to deal with the risks surrounding climate change. 

Eye On The Markets 

This week, on Friday (12Aug), the Ringgit opened at 4.4475 against the USD from 4.4595 on Monday (8Aug). Meanwhile, the Ringgit was 3.2461 to the Sing Dollar on Friday (5Aug). On Monday (8Aug), the FBM KLCI opened at 1501.58. As at Friday (12Aug) 10:00am, the FBM KLCI is up 2.95 points for the week at 1504.53. Over in US, the overnight Dow Jones Industrial Average closed up 27.16 points (+0.08%) to 33,336.67 whilst the NASDAQ shed 74.89 points (-0.58%) to 12,779.91.  

KWAP targets RM200b gross fund size by 2025, eyes private market 

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According to The Retirement Fund (Incorporated) (KWAP) CEO Nik Amlizan Mohamed, the fund plans to achieve RM200 billion target in total gross fund size by 2025 from RM159 billion currently through increasing its investments in the private market, which include equity, infrastructure and property domestically and internationally. It is seeing double-digit growth of return in the private market space while the return from the public market has not been on a high trajectory. Currently the fund’s asset allocation is towards the public market, that is listed equity as well as the fixed income space. Moving forward the focus is very much on the private market side. He was speaking at the launch of KWAP’s three-year programme Teras 5, which was officiated by Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz. 

Currently, KWAP’s public and private investment portfolios are at 90% and 10% respectively. Through Teras 5, it plans to increase its private investments to 20% by 2025. KWAP intends to stretch the total return to 7% in three years from 6%, which was its return each year for the past 10 years. Teras 5 is part of the fund’s long-term plan to increase the size of the fund more effectively and sustainably and further strengthen its capability to benefit government retirees at present and in future. 

The programme is based on elevating five enablers, namely structure, governance, people, processes and digital to drive eight workstreams, including organisational structure, enterprise, investment, contribution and retirement services, digital, people and culture, corporate services, and risk, governance and oversight. The programme was entirely developed by the KWAP team with no involvement from external consultants. 

Foreign investors turned net buyers, partly lifting FBMKLCI in July – CGS-CIMB 

According to CGS-CIMB, foreign investors, which turned net buyers in July, helped contribute to the 3.3% month-on-month (m-o-m) gain of the benchmark FBMKLCI last month. The gain was also partly fuelled by expectation that concerns over a US recession may have been priced in after the recent market selloff. The research house noted that foreign investors emerged as net buyers in the local bourse after Bursa Malaysia witnessed an inflow of RM175 million from foreign funds across all Malaysian securities last month. The net buying by foreign investors comes after a RM1.3 billion net sell in the previous month which was also the highest monthly net sell since July 2021. In total, the cumulative foreign net inflows for the first seven months of the year (7M2022) amounted to RM6.3 billion, which is a stark contrast to the 7M2021 net sell of RM5.5 billion. Citing Bursa Malaysia statistics, sectors that attracted the highest foreign investment last month were financial services (RM237.63 million), healthcare (RM120.31 million) and utilities (RM53.12 million). Local retailers and institutional investors turned net sellers for July at RM16 million and RM41 million respectively. Local retailers 7M2022 net buy of Malaysian equities amounted to RM1.7 billion, compared to 7M2021 net buy of RM9 billion. As for local institutional investors, 7M2022 net sell amounted to RM7.9 billion, higher than the 7M2021 net sell of RM6.3 billion. On average daily trading value (ADTV), the broking firm highlighted ADTV in July fell 29% m-o-m to RM1.4 billion, representing the lowest monthly ADTV since December 2012. The average daily trading volume fell 20% m-o-m to 2.2 billion units in July. The market capitalisation of Bursa Malaysia’s main board grew 2.7% m-o-m to RM1.65 billion as at end-July, a smaller gain than the KLCI’s 3.3% m-o-m. Notably, at 3.3% m-o-m gain in July, the KLCI outperformed the MSCI All Country ex-Japan index. Among the benchmark indices of neighbouring countries, namely Indonesia, Singapore and Thailand, it was also the second best performing market in July after Singapore’s, which gained 3.5% m-o-m. For the month of August, the performance of the KLCI tends to be negative based on historical data, with average of -0.3% m-o-m returns over the past 10 years. It expects the KLCI to be range-bound in August, with possible downside risk if there are negative surprises from the earnings season. The 2Q22 results seasons have been mixed so far. On the market outlook, the key negative surprises during the results season so far came from glove makers, while REITs that reported results posted better-than-expected earnings. Its top three picks include Genting Malaysia Bhd (target price: RM3.30, MR DIY Group Bhd (target price: RM2.40) and RHB Bank (target price: RM7.70). 

Eye On The Markets 

This week, on Friday (5Aug), the Ringgit opened at 4.4565 against the USD from 4.4505 on Monday (1Aug). Meanwhile, the Ringgit was 3.2380 to the Sing Dollar on Friday (5Aug). On Monday (1Aug), the FBM KLCI opened at 1492.67. As at Friday (5Aug) 10:00am, the FBM KLCI is up 7.12 points for the week at 1499.79. Over in US, the overnight Dow Jones Industrial Average closed down 85.68 points (-0.26%) to 32,726.82 whilst the NASDAQ added 52.42 points (+0.41%) to 12,720.58. 

Malaysian market still attractive for investors – Bursa CEO

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According to Bursa Malaysia Bhd Chief Executive Officer Datuk Muhamad Umar Swift, Malaysia’s capital market will still be attractive for investors despite the recent monetary tightening globally, particularly for those who have a medium-term investment horizon. Looking at Malaysia, we have a projected GDP growth of around 5.5% for 2022, and it is a compelling story. He was speaking during Bursa Malaysia’s financial results briefing held virtually. Theoretically, there should be a flight to higher yield products when interest rates are increased. That is what we see particularly in the foreign exchange market. That being said, it may also spur interest in the equity market, as there is more clarity. With the ringgit weakening recently, there is an upside potential for investors to invest in Malaysia, given the country’s strong current account surplus. This is a tremendous opportunity for investors, particularly foreign investors, to come to our market over a medium term for potential uplift on foreign exchange, as well as growth of our companies. The ringgit has depreciated by 6.85% to 4.4517 against the US dollar year-to-date. Bursa Malaysia Bhd reported a 33.16% fall in net profit for the second quarter ended June 30, 2022 (2QFY22) to RM59.47 million, from RM88.97 million a year ago, mainly due to lower securities trading revenue. Quarterly revenue declined 22.55% to RM151.89 million, from RM196.1 million previously. Bursa’s average daily trading value for 2QFY22 also fell by 42% to RM2.23 billion, from RM3.86 billion. For 1H2022, Bursa’s net profit dropped 39.42% to RM127.44 million, from RM210.36 million in the previous year’s similar period, amid lower operating revenue — down 26.4% to RM309.4 million from RM420.2 million — amid a decline in securities trading revenue. Six-month revenue declined 25.96% to RM317.185 million, from RM428.37 million previously. Also speaking at the briefing was Bursa Malaysia Chairman Tan Sri Abdul Wahid Omar who said that Malaysia’s economic growth is expected to be supported by firm domestic demand and this could potentially lift investor sentiment and boost stock market performance. While Bursa Malaysia remains committed to long-term market development through products and ecosystem enhancement, the bourse will also focus on a number of items to help boost market sentiment and sustain foreign investors’ interest in the short-term. 

Banks remain resilient in economic uncertainties – RAM 

According to RAM Ratings banking sector specialist Amy Lo, he local banking system could continue to deliver resilient performance in the coming year although global and domestic conditions have become more uncertain. Sturdy capitalisation and strong provisioning buffers have put banks in a good position to cope with fresh macroeconomic headwinds from the spill over effects of the Russia-Ukraine war. The majority of bank ratings is expected to stay intact in the next 12 months. Any rating action will likely be prompted by bank-specific challenges, rather than broad industry concerns. She was speaking at the RAM Insight Series webinar titled “Banking Sector: Gearing up for the next challenge”. The agency expects loan growth to come in at 4.5% to 5% in 2022 (2021: 4.5% growth), driven by both household and business loans. Loan applications began to pick up in the fourth quarter of 2021, underpinned by pent-up demand and the reopening of the economy. Bank Negara’s two recent 25 basis point (bps) overnight policy rate hikes and another 25 bps increase expected in the second half of 2022 may dampen credit demand, but should not derail the loan growth momentum. 

Country on firm recovery path – domestic and external factors to drive growth – BNM 

According to Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus, Malaysia’s economy is firmly on a recovery path supported by domestic and external demand. The economy is expected to grow steadily in 2022 and 2023 despite the challenges from rising cost pressures, the Russia-Ukraine military conflict and China’s strict Covid-19 containment measures. The country is benefiting from the strong demand for its exports especially electrical and electronics, commodity-based and other diversified export products. The global market will continue to support the country’s export growth. Based on observation, we are seeing increased strength in domestic demand, domestic spending particularly consumers’ expenditure, of which retail sales, debit card transactions and consumer goods imports have exceeded pre-pandemic levels. She was delivering her keynote address at the 12th International Conference on Financial Crime and Terrorism Financing 2022. She noted the strengthening job market has benefited the country’s economy and 26,000 new jobs were created in the first three months of this year – similar to the pre-pandemic level. Simultaneously, job vacancies and wages are also rising, which would further reinforce the recovery in domestic demand going forward. On rising prices, the current situation is a global phenomenon and Malaysia is impacted due to the indirect effect of high global commodity prices as they are the key driver for the rise in producer input costs. Inflation development in Malaysia was reflected by the pass-through of some of these costs as well the strengthening domestic demand. Consequently, although the headline inflation is projected to remain low and stable to range between 2.2% and 3.2% this year, core inflation increased to an average of 2.2% in the first six months of this year compared with only 0.7% in 2021. As the economy was on a firmer growth trajectory and no longer in a state of crisis, the central bank through the Monetary Policy Committee judged that it was the right time to begin withdrawing the excess support, revising the overnight policy rate from its historically low 1.7%. What is important is by acting pre-emptively, BNM will be in a position to undertake the adjustment to the monetary policy setting in Malaysia gradually and this is also to restore and support sustainable growth over the medium and longer term. The timing, pace and extent of interest rate increases would be guided by assessments. 

REITs 2Q earnings likely to remain strong – Inflationary concerns prompt caution for third quarter – UOB Kay Hian 

According to UOB Kay Hian Research, the real estate investment trust (REIT) sector’s 2Q earnings are expected to remain strong, but the trend may not be robust enough to carry into 3Q of this year because of inflationary concerns. However, REITs still command attractive yields of at least 5%, compared with fixed income instruments. The better earnings in 2Q22 is led by the festive season and the Employees Provident Fund (EPF) special withdrawal scheme. The 3Q earnings will be weaker and cautioned that the impact of inflation may also dampen consumer sentiment. For 2Q22, the research house is forecasting earnings growth of 36% and 5% for 2022 and 2023 respectively, on the back of the absence of rental assistance amid the economic reopening. Headline inflation for June breached 3%, coming in at 3.4% from 2.8% in May. The central bank has raised the overnight policy rate (OPR) by 50 basis points (bps) year-to-date and is expected to increase it by another 25 bps by year-end and 50 bps in the first half of 2023 to reach 3% by mid-2023. Although any rate hike would be considered a negative for the sector, UOBKH Research believes the impact would be manageable, given the REITs’ healthy gearing levels and earnings recovery. The current gearing levels are healthy at 31.7% on average. The majority of the debt taken by REITs are on fixed financing (61% of total debt on average), which makes the impact manageable. In addition, the earnings growth trajectory is enough to overcome it as well. This has been proven in their latest quarterly results where footfall and tenant sales continued the momentum from 4Q21. In the recent 2Q22 results posted, CapitaLand Malaysia Trust-REIT retail recorded 13% and 101% earnings growth quarter-on-quarter and year-on-year. The research house prefers the retail segment, particularly prime, niche malls for their proven business resilience. Tenant sales at malls continued with good momentum since 4Q21, amid the festive season, in addition to the special EPF withdrawal scheme. Furthermore, the opening of international borders in April will further boost footfall and sales. On hotels and hospitality REITS, it expects a gradual recovery with substantial traction from 2H22 onwards, during the holiday season. On office REITs, it said although the industry is still grappling with oversupply, it believes selected office REITs located in strategic locations with good connectivity, such as KL Sentral, will benefit from higher demand. Industrial REITs will continue to thrive with businesses continuing as usual. UOBKH Research maintains its “overweight’’ stand on the sector. Its top picks are Sunway-REIT (border reopening recovery), Sentral-REIT (high and resilient yields of 7% to 8%), and IGB-REIT (resilient and stable earnings). 

Eye On The Markets 

This week, on Friday (29July), the Ringgit opened at 4.450 against the USD from 4.453 on Monday (25July). Meanwhile, the Ringgit was 3.2246 to the Sing Dollar on Friday (29July). On Monday (25July), the FBM KLCI opened at 1463.78. As at Friday (29July) 10:00am, the FBM KLCI is up 30.98 points for the week at 1494.76. Over in US, the overnight Dow Jones Industrial Average closed up 332.04 points (+1.03%) to 32,529.63 whilst the NASDAQ added 130.17 points (+1.08%) to 12,162.59. 

Bursa posts largest YTD on-month drop in listed firms’ market cap

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According to Bursa Malaysia’s research arm Bursa Digital Research, the total market capitalisation (market cap) of companies listed on the bourse was lower at RM1.648 trillion as at end June 2022 compared to RM1.774 trillion a month earlier amid lingering concerns on a potential recession in the US and global monetary policy tightening or interest rate hikes to fight inflation. At RM1.648 trillion as at end June 2022, Bursa-listed companies’ market cap had fallen RM126 billion from RM1.774 trillion a month earlier to post the largest year-to-date (YTD) on-month drop in Bursa-listed firms’ market cap so far in 2022. Fear over recession in the US market and tightening monetary policy continued to linger over market sentiment. In June, trading on the local bourse was weaker as monthly ADV  (average daily traded value) moderated to RM1.9 billion (May: RM2.39 billion). Trading momentum was lowered across all investor segments, with the largest decline in the foreign ADV. Local institutions became net buyers of local equities in June 2022 after selling for the past five months. In June, local institutional inflow (into local equities) amounted to +658 million. Meanwhile, foreign investors were net sellers of local equities with a net outflow of RM1.28 billion in June 2022. However, they remained as net purchasers up to June (2022) with +RM6.08 billion. Research data shows that so far in 2022, Bursa-listed companies’ market cap had fallen on-month in January, March, May and June. In January 2022, the figure fell RM58 billion from a month earlier while the March figure dropped RM11 billion. In May, Bursa-listed companies’ market cap was down RM52 billion from a month earlier. At the bourse’s 12:30pm break on Tuesday, its share price settled down one sen or 0.16% at RM6.24 with 41,600 shares traded. At RM6.24, Bursa has a market cap of about RM5.05 billion based on the group’s 809.3 million outstanding shares. Bursa has scheduled to release its financial results for the second quarter ended June 30, 2022 on July 28, 2022. 

Budget 2023 to focus on sustainable subsidies, boosting country’s resilience – Tengku Zafrul 

According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, Budget 2023 will focus on a more sustainable subsidy management, strengthening the country’s resilience against future shocks and fiscal consolidation. This is in view of increasing inflationary pressures, especially on commodity and food prices. Budget 2023 will take into consideration sustainability-related initiatives as the world grapples with challenges involving geopolitical uncertainties and climate change. This was in a written parliamentary reply to Datuk Seri Saifuddin Nasution Ismail (PH-Kulim-Bandar Bharu), who wanted to know how the policies, strategies and approach in drafting Budget 2023 differ from past budgets. He continued that economic reform efforts will also be given priority to enhance business competitiveness and the value chain. In line with the post-Covid-19 economic recovery momentum, Budget 2023 will also continue to focus on the people’s well-being agenda, especially in terms of income and social protection. The inclusivity agenda, in line with the Shared Prosperity Vision 2030’s objectives, will be emphasised as well, to ensure a fair and equitable wealth distribution. Throughout the Budget 2023 preparation process, the government is committed to holding stakeholder engagement sessions especially to gain public views and feedback in line with the priorities set. The theme of Budget 2023 is “Strengthening Recovery, Facilitating Reforms Towards Sustainable Socio-Economic Resilience of Keluarga Malaysia”. 

Petrochemical industry to see faster growth – MPA 

According to the Malaysian Petrochemicals Association (MPA) president Akbar Md Thayoob, the country’s petrochemical industry is poised to grow at a faster rate in future, considering petrochemical is an important element for the world to move towards energy efficiency and net zero emission. The industry is expected to record an average compound annual growth rate of 5% to 6%, which is higher than the country’s gross domestic product (GDP), despite numerous external economic uncertainties like the Russia-Ukraine conflict. Petrochemicals will always be growing at above the GDP rate and some industries will be growing much faster than the others but on average, overall, it is an important growth engine for the country. He was speaking at the press conference on the upcoming Oil and Gas Asia 2022 conference. While noting that petrochemicals offer solutions that many are not familiar with, he dismissed the notion that the industry is on a downcycle and reiterated that it is stabilising after the Covid-19 pandemic. However, there is a lot of uncertainty still, moving forward. The cycle in today’s era is no longer the same as the last time, where every 10 years, you see a very clear trend. Now, there are blips in between and it’s no longer like before, where one can simply say that we are riding up. He observed that the petrochemical industry in Malaysia is also moving from commodities-based towards specialties, with many companies also going into merger and acquisitions to accelerate the acquisition of knowledge and capability towards offering the kind of solutions they can bring to the market. Citing Petronas’ downstream unit, Petronas Chemical Bhd, which recently purchased Swedish company Perstorp Holdining AB, he said this is very important for the state oil company to leapfrog and acquire such capability and bring that over throughout the region and replicate it. 

Eye On The Markets 

This week, on Friday (22July), the Ringgit opened at 4.4530 against the USD from 4.4460 on Monday (18July). Meanwhile, the Ringgit was 3.2016 to the Sing Dollar on Friday (22July). On Monday (18July), the FBM KLCI opened at 1420.89 As at Friday (22July) 10:00am, the FBM KLCI is up 33.08 points for the week at 1453.97. Over in US, the overnight Dow Jones Industrial Average closed up 162.06 points (+0.51%) to 32,036.90 whilst the NASDAQ added 161.96 points (+1.36%) to 12,059.61. 

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.

BNM raises OPR by 25 bps to 2.25%BNM raises OPR by 25 bps to 2.25%

Inve$t | Market Sentiments

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According to Bank Negara Malaysia, the Monetary Policy Committee (MPC) has decided to increase the overnight policy rate (OPR) by 25 basis points (bps) to 2.25% as the unprecedented Covid-19-driven conditions that necessitated a historically low OPR continued to recede. The ceiling and floor rates of the OPR’s corridor are correspondingly increased to 2.5% and 2.0% respectively. Amid the positive growth prospects for the Malaysian economy, the MPC decided to further adjust the degree of monetary accommodation. This is consistent with the MPC’s view that the unprecedented conditions that necessitated a historically low OPR have continued to recede. At the current OPR level, the stance of monetary policy remains accommodative and supportive of economic growth. The MPC will continue to assess evolving conditions and their implications for the overall outlook to domestic inflation and growth. Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability. The reopening of the global economy and improvement in labour market conditions continued to support the recovery of economic activity. However, these have been partly offset by the impact of rising cost pressures, the military conflict between Russia and Ukraine, and strict Covid-19-driven containment measures in China. Inflationary pressures have continued to increase mainly due to elevated commodity prices and strong demand conditions despite some easing in global supply chain conditions. Consequently, central banks are expected to continue adjusting their monetary policy settings, some at a faster pace, to reduce inflationary pressures. Going forward, the pace of global growth is expected to moderate, and will continue to be affected by elevated cost pressures, the conflict in Ukraine, global supply chain conditions and financial market volatility. On the Malaysian economy, the country’s economic activity continued to strengthen in recent months. Exports and retail spending indicators have affirmed the nation’s economic growth momentum, supported by the country’s transition to Covid-19 endemic status from pandemic previously, according to BNM. In the labour market, the unemployment rate declined further, with higher labour participation and improving income prospects. Looking ahead, while external demand is expected to moderate, weighed by headwinds to global growth, Malaysia’s economic growth will be supported by firm domestic demand. Additionally, the reopening of international borders since April 1, 2022 would facilitate the recovery of tourism-related sectors. Investment activity and prospects continue to be supported by the realisation of multi-year projects. However, downside risks to growth continue to stem from a weaker-than-expected global growth, further escalation of geopolitical conflicts, and worsening supply chain disruptions. On inflation, year-to-date in 2022, Malaysia’s headline inflation, as measured by the Consumer Price Index, averaged 2.4%. While the country’s inflation is projected to remain within the 2.2% to 3.2% forecast for the year, the nation’s headline inflation may be higher in some months due mainly to the base effect of electricity prices. Underlying inflation, as measured by core inflation, is expected to average between 2% and 3% in 2022 as demand continues to improve amid the high-cost environment. Nevertheless, the extent of upward pressures on inflation will remain partly contained by existing price controls, fuel subsidies and continued spare capacity of the economy. The inflation outlook for Malaysia continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions, as well as domestic policy measures. 

Macro issues weigh on Bursa Malaysia – Maybank IB 

According to Maybank Investment Bank’s research unit, while resilient external demand and strong banking sector fundamentals provide key support, the market will struggle to find traction in the face of broadening growth and earnings stresses. This was due to negative revisions stemming from an interrelated combination of margin squeeze and weakening end-demand. In a report to clients titled “Malaysia 2H2022 Market Outlook Storm Warning”, policy flip-flops relating to subsidies have also raised market risk premium as the implied urgent fiscal situation will raise concerns about further earnings-sapping levies on the corporate sector akin to Cukai Makmur. It also said hopes of an early general election that would allow a reset in delivering optimal and expedited policy responses based on long-term economic realities now appeared unlikely. On thematic, inflation and interest rates will dominate market direction. However the local market and other Asean benchmark indices as a whole had been relative outperformers on a year-to-date basis. But macro challenges relating to surging inflation, sharply rising interest rates and growing recession risks that have weighed on developed markets are now catching up with this region. As evidenced during the mixed first-quarter 2022 reporting, operating margin pressures have been rising across a broad range of sectors, underpinned by increasing labour and raw material input costs, while a damaging combination of rising inflation and interest rates are eroding disposable incomes, and hence demand, into the second half of 2022. The tight fiscal situation means concerns around the sustainability of current inflation-capping subsidies are a major market overhang, the latter made worse by policy inertia and more U-turns by a fractious governing coalition that has yet to signal readiness to go to the polls. Maybank IB is reducing its end-2022 FBM KLCI target to 1,500 points (from 1,710 points) and retains a balanced positioning, via a mix of value and growth stocks and continuing focus on yield. 

Malaysia still most preferred market for retail investors – CGS-CIMB retail investors’ sentiment survey 

According to CGS-CIMB, its 2022 CGS-CIMB retail investors’ sentiment survey revealed that Malaysia continues to be the most preferred market for retail investors to invest in this year. The survey, which was conducted from June 13-22 and included some 1,068 Malaysian participants, revealed that 63% of the retail investors picked Malaysia as their most preferred market to invest in. Based on the score derived from the ranking placed by respondents, the final score on the most preferred market for exposure in equities were Malaysia, the United States, Singapore, Hong Kong/China, Indonesia, Thailand and others. The survey also indicated that higher income investors are keener to invest overseas, in particular the United States, Hong Kong/China and Singapore markets, because they look to diversify and search for better returns on their investments. It noted rising preference to invest in US, Hong Kong/China and Singapore markets. Investors that choose the United States as their most preferred market rose to 21% from 16% in 2021. Another 8.1% revealed that Hong Kong/China is their most preferred market to invest in now. For Malaysia, the survey showed that retail investors’ share of trade fell from its peak of 37% in 2021 to 27% in the first half of this year (1H22). Likewise, their net buy flow for equities has fallen 79% year-on-year to RM1.7bil in 1H22 from RM8.2bil in 1H21. They are currently the second-largest participants behind institutional investors’ share of trade of 47% but ahead of foreign investors’ 26% share of trades in 1H22. Most retail investors surveyed remained net buyers in the market over the past 12 months. The survey noted that retail investors surveyed were bearish about the market outlook for the next six months, with 47% expecting it to post negative returns. That said, the majority of the respondents expected lower return from the stock market of 0%-10% this year as compared to 11%-20% a year ago. The respondents’ top three concerns for the equity market were the state of the domestic economy, sharp fall in stocks as well as external factors including rising interest rates and a crash in the US market. Nonetheless, the survey gathered three big catalysts that could prompt investors to buy more equities – a sharp fall in the stock market that could push stock valuations to attractive levels, stronger economic growth and a more stable political landscape. In particular, the survey showed that respondents preferred to invest directly in the Malaysian equity market and appeared less keen on unit trust products and robo-advisers compared to a year ago. Their key motivation for investing in equities is to achieve higher returns from their savings and their preferred trading strategies continue to be buy and hold. 

Eye On The Markets 

This week, on Friday (8July), the Ringgit opened at 4.4250 against the USD from 4.4085 on Monday (4July). Meanwhile, the Ringgit was 3.1642 to the Sing Dollar on Friday (8July). On Monday (4July), the FBM KLCI opened at 1449.50. As at Friday (8July) 10:00am, the FBM KLCI is down 24.21 points for the week at 1425.29. Over in US, the overnight Dow Jones Industrial Average closed up 346.87 points (+1.12%) to 31,384.55 whilst the NASDAQ added 259.49 points (+2.28%) to 11,621.35.