Domestic-driven stocks in spotlight in Malaysia as new macro blueprints take shape

[KUALA LUMPUR] Market analysts in Malaysia are shifting their attention to domestic-driven stocks following the government’s recent announcements of several new macro blueprints that are likely to give a much-needed boost to the economy.

Most listed companies have announced their second-quarter results, with companies in the automotive, banking and finance, consumer, healthcare, real estate, transport and utilities sectors recording strong earnings growth.

The earnings of companies that relied on exports – such as those in the technology, industrial goods (mainly gloves), agri-business and energy sectors – shrank due to declining orders and lower average selling prices, as well as the weakening ringgit.

In the second quarter of this year, the aggregate reported earnings of the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) 30 constituents came in at RM14.1 billion (S$4.13 billion). This was 11 per cent lower compared to the previous three months, and 10.8 per cent lower than the second quarter of 2022.

Vincent Khoo, the head of research at UOB Kay Hian Malaysia, described this as “another quarter of widespread disappointment”, as 31 per cent of stocks under its coverage missed forecasts, and 9 per cent of the companies which exceeded forecasts “picked up (only marginally)”.

Sector-wise, he said, disappointments were prevalent across the board – with the building materials, construction, healthcare and glove sectors all chalking a lacklustre performance.

On the full-year earning forecast for the stocks under coverage, UOB Kay Hian maintained its “risk-on mode” and estimated full-year net profit to reach RM75.6 million. This is lower than its forecast of RM82.6 million in June. 

RHB Investment Bank also cut its earnings expectations by 3.4 per cent for 2023 and 2 per cent for 2024, after 38.5 per cent of the stocks under coverage missed estimates.

“Quarter on quarter, large-cap component stocks (of FBM KLCI) did worse after 37 per cent of companies reported disappointing results (compared to 22 per cent in the previous quarter),” said Alexander Chia, the regional head of research at RHB Investment Bank.

He noted that key risks for equities included a weaker ringgit against the US dollar, and the slower-than-expected pace of economic recovery in China.

A quicker pace of implementation of the government’s reform agenda and gradual improvements in the global macroeconomic outlook prompted re-rating.

“While a core defensive stance is still preferred, market weakness should be seen as opportunities to gradually deploy cash hoards to add to equity positions,” Chia said in a report on Monday (Sep 4).

Outlining the brokerage’s investment strategy, CGS-CIMB Securities managing director and head of market research Chehan Perera said domestic-focused sectors remained the top picks. This includes banks, construction and material, real estate and real estate investment trusts.

Based on the Bursa sector indices movement, the domestic-driven sectors of property, construction and finance were up 24 per cent, 10 per cent and 8 per cent, respectively, since early June. Growth was higher than the 5 per cent gain in Malaysia’s benchmark FBM KLCI during the same period.

As more macro blueprints are being unveiled by the Malaysian government, Maybank Investment Bank’s head of Asean equity research Wong Chew Hann sees them as the potential catalysts that will enhance investors’ confidence in the country.

Prime Minister Anwar Ibrahim launched three key blueprints in recent months – a new economic framework in July; the National Energy Transition Roadmap in August; and the New Industrial Master Plan 2030 earlier this month.

New measures and policies under these blueprints aim to drive economic transformation to attract foreign investment in high-quality projects in Malaysia that can create employment and pay better salaries.

Wong noted that the 12th Malaysia Plan Mid-Term Review that is likely to be announced this month and the Budget 2024 statement in October will be closely watched.

With more positive growth tailwinds in the coming quarters, Maybank Investment Bank expects the FBM KLCI to move up to a new target range of 1,600 to 1,700 points, but maintained its 2023 forecast at 1,520 points.

“Near-term downside risks (include) declining demand due to slower-than-expected growth in China, pressured average selling prices, and extended margin pressure due to higher labour and material costs,” Wong added.

At the current level of 1,452 points, the FBM KLCI is trading at 12.9 times its 12-month forward price-to-earnings (PE) ratio.

UOB’s Khoo observed that there is room to upgrade its FBM KLCI target of 1,540 points after factoring in a lower political risk premium and progressive policies under the unity government.

He expects an improved earnings outlook for the upcoming quarters on optimism of toppish US interest rates, the bottoming out of the global tech downcycle, and China’s eventual economic recovery.

RHB Investment Bank has “overweight” ratings on the banking, oil and gas, utilities, basic materials, non-bank financial institutions, healthcare and property sectors. It maintains its year-end FBM KLCI forecast at 1,500 points.

MIDF Research is also upbeat on the FBM KLCI movement, and expects it to trend higher as market sentiment is engendered by the US Federal Reserve’s likely cessation of interest-rate hikes as well as a “relatively attractive valuation by Malaysia’s general macro growth”.

The research company maintains its FBM KLCI year-end target at 1,540 points. This values the index at around 15.3 times its PE ratio.

At the close of trading on Wednesday, the FBM KLCI ended 5.8 points higher at 1,460.6 points.