Investors seen hunting value in 1MDB-stricken Malaysian stocks

[KUALA LUMPUR] With Malaysian stocks on the brink of their longest stretch of annual losses ever, one money manager is buying amid bets valuations and signs of shifting overseas sentiment will spur a rebound.

Gan Eng Peng of Affin Hwang Asset Management Bhd says earnings are stabilising after sinking to the lowest since 2011, while an undervalued ringgit may prompt foreigners to consider buying again. Overseas brokers he spoke to have signalled unusual interest in Malaysia, says Mr Gan, who took "big positions" in three of the largest stocks including Sime Darby Bhd and CIMB Group Holdings Bhd. The move comes in a market clouded by weak profits and a scandal linked to a state fund.

"After nine quarters of earnings disappointment, we could be reaching the end of the downgrade cycle," said Mr Gan, equities head of Kuala Lumpur-based Affin Hwang, whose Select Opportunity Fund beat 97 per cent of peers with an 11 per cent return in the past year.

"Foreign funds are on the hunt for ideas in Malaysia. The strong outperformance of Indonesia, political issues in Thailand and Philippines, could drive some re-balancing of monies into Malaysia."

Stocks in Malaysia, home to the world's longest bull market, haven't been this cheap since 2009 relative to global equities. Yet they have been laggards in South-east Asia, caught between weak oil that has dented the government's oil revenue, a scandal engulfing 1Malaysia Development Bhd, and the prospect for higher US borrowing costs. The benchmark stock index is headed for a third year of declines.

While Indonesian and Thai shares are up at least 16 per cent this year and the Philippines has gained 11 per cent, Malaysian equities are down 1.5 per cent. They may catch up, Mr Gan says.

"Foreign funds are attracted by the 33 per cent underperformance" of the ringgit versus its Asian peers since 2013, he said. "Recent investment conferences including one in Hong Kong have seen packed participation for Malaysia strategy meetings, which is unusual. The big caveat is that all these have not resulted into stronger foreign flows yet."

Foreign buying has been erratic. Inflows hit a peak of 6.4 billion ringgit (S$2.1 billion) in April, only to see a selloff halving them to 2.2 billion ringgit as of last week. Foreigners pulled 26.4 billion ringgit in the last two years.

The FTSE Bursa Malaysia KLCI Index is valued at 18 times its current earnings, the cheapest since 2009 versus the MSCI All Country World Index. The measure sank 3.9 per cent in 2015. It almost doubled from its 2008 low without succumbing to a 20 per cent drop, making it the longest bull-market worldwide.

Not everyone is optimistic.

"The negative newsflow surrounding 1MDB is a drag to foreign funds," said Clive McDonnell, Singapore-based head of emerging-markets equity strategy at Standard Chartered Plc. "It is certainly attractive by its value, however cheap stays cheap without a catalyst."

1MDB is at the centre of multiple international investigations into whether money was mishandled at the state-owned fund. Earlier this month, Singapore regulators ordered Falcon Private Bank to cease operations in the island city for breaches of anti-money laundering regulations in relation to its role in moving funds associated with 1MDB. The fund has consistently denied any wrongdoing.

Stocks "risk becoming a value trap without better growth," said Alan Richardson, a Hong Kong-based fund manager at Samsung Asset Management Ltd. Opportunities are mainly confined to smaller stocks outside of indexes, he said.

Earlier this month, Fitch Ratings raised its outlook on plantation giant Sime Darby to stable following a share sale, saying business has improved significantly. Banking group CIMB posted a 38 per cent gain in first-half profit, following a slump a year earlier, and predicted a "better" performance in the second half.

"2017 is looking like it could generate about 7 per cent to 8 per cent corporate earnings growth," said Mr Gan. "Combined with 2 per cent to 3 per cent market yield, total return is around 10 per cent."

Mr Gan bought real estate investment trusts and high dividend stocks amid a "low growth and low rate environment." He's also more selective in buying rather than broad-based. He bought CIMB for its turnaround of its Indonesian business, Sime Darby for a potential revamp, and Tenaga Nasional Bhd, the cheapest non-bank large-cap stocks.

"Less is more," he said. "A broader portfolio will end up with more bombs."

BLOOMBERG