Remain Optimistic About FBMKLCI - Buy on Weakness

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) plunged 78.81 points to a four-month low of 1,532.24 last Monday on external dampeners. It recovered swiftly most of its losses last week driven by buying support from local institutions while foreigners continued to offload. Worries about the US recession have abated after the Federal Reserve came to the defence and said the US job market is normalising and the increase in July unemployment rate was not attributed to companies firing workers but due to the job participation rate and immigration rising at a faster pace than hiring. Affirmation from the Bank of Japan’s deputy governor that it will not raise interest rate if the market is unstable also defused the downside pressure caused by the hedge funds unwinding yen carry trades. The absence of Iran’s strong retaliatory measures against Israel after the US state secretary said an attack could happen last Monday or Tuesday also contributed to the relief rally. The market extended gains ahead of the weekend, in line with the region following the overnight rally on Wall Street after lowerthan-expected weekly jobless claims reduced recession fears, which had sparked the initial market selldown.

Week-on-week, the FBM KLCI slid 15 points, or 0.93 percent, to 1,596.05, as slight gains on Mr. DIY (+4sen), SD Guthrie (+4sen) and Sunway Berhad (+3sen) were overcome by losses in Petronas Chemicals (-27sen), YTL Power (-14sen), Genting Berhad (-12sen) and CelcomDigi (-8sen). Average daily traded volume last week climbed to 5.86 billion shares versus 4.3 billion shares the previous week, while average daily traded value rose to RM4.67 billion, against the RM3.3 billion average the previous week.

Looking ahead, we remain optimistic about the FBMKLCI’s ability to claw back its recent losses, driven by positive news flows from abroad and domestically. Key US data on consumer price index (CPI), retail sales, housing market, and the University of Michigan’s inflation expectations data are due this week. Signs of moderation without excessive weakness in these data should sustain market recovery and expectations for a rate cut in September, which could be 25 basis points. Another cut could follow through in November to engineer a soft landing, if the economic data warrants. The CPI for July for instance is expected to remain at 3.0% YoY but the core CPI excluding food and energy is forecast to cool slightly to 3.2% from 3.3% YoY a month earlier, according to Bloomberg consensus forecast. Expectations of a soft landing in the US amid a monetary easing cycle should work in favour of a stronger Ringgit.

With the local economy on a stronger footing and the government striving to improve the nation’s finances and fiscal deficit through structural reforms and various long-term growth plans, foreigners’ interest in the Malaysian equities should pickup in the coming months. Their shareholding has been hovering around a low of 19.5% to 19.7% since July 2023 and it is in their best interest to increase exposure in this undervalued local market before the ringgit sees further appreciation from last Friday’s close of RM4.4815 against the US dollar. The final figure of Malaysia’s 2Q24 gross domestic product, which is due this Friday, is not expected to deviate much from the Department of Statistics Malaysia’s advanced estimate of 5.8% YoY and could contribute to a full year growth that may fall near the upper range of the government’s official growth forecast of 4% to 5% (TA: 4.7%) in 2024.

China may contribute to optimism about Malaysia’s economic growth prospects as well after its July producer and consumer price indices showed slight improvement last Friday. Focus this week will be on its industrial production, retail sales and property investment data to see whether the central bank and government’s measures of reducing lending rate and increasing spending, respectively to boost consumption and private investments bearing results or not.

We maintain our end-2024 FBMKLCI target of 1,690 based on CY25 PER of 14.4x. We remain optimistic about the earnings growth prospects and share price appreciation potential of our top picks for 2H24, which are mostly from the Banking, Construction, Consumer, Healthcare, Power, Property and Telco sectors. Maintain buy on PBBANK (TP:RM5.05), YTLPOWR (TP:RM6.35), TM (TP:RM7.70), GAMUDA (TP:RM9.94), INARI (TP:RM4.43) and IOIPG (TP:RM3.10). Top small and mid-cap stocks are INTA (TP:RM0.71), PGF (TP:RM2.76), IBRACO (TP:RM1.33), ABLEGLOB (TP:RM2.57), SCOMNET (TP:RM1.73), FFB (TP:RM1.97), SUNCON (TP:RM6.15) and SIMEPROP (TP:RM1.98).

Source: TA Research - 12 Aug 2024