Encouraging signs from market rebound

To date, the FBM SC has outperformed the FBM KLCI (-3.8 per cent) thanks to the strong run for chemical, consumer and oil & gas counters. — Bernama photo

 

KUCHING: After a lacklustre 2022, Malaysia’s market may have more reasons to be less pessimistic with the macroeconomic and domestic political scene seemingly reaching inflection points, analysts at the research house of RHB Investment Bank Bhd (RHB Investment) observed.

“As the dust settles in the domestic political scene (at least for now), potential signs of the peaking of inflation and interest rate hike cycle, coupled with the progressive reopening of China’s lockdown, our local bourse has come to life after being dreadful for the large part of the year, with the FBM KLCI staging a relatively strong rebound of 6.7 per cent from a six-month low in October 2022, and the FBM 70 and FBM SC following suit to recoup some losses.

“To date, the FBM SC has outperformed the FBM KLCI (-3.8 per cent) thanks to the strong run for chemical, consumer and oil & gas counters. The relative weaker performance of FBM 70 (-9.2 per cent) compared to the FBM KLCI is due to the de-rating of technology and glove related stocks for the former and the outperformance of banking stocks and net foreign inflow for the latter,” RHB Investment analyst Lee Meng Horng commented in a report.

“With the macroeconomic picture and domestic political situation seemingly reaching an inflection point, there is now more reason to be less pessimistic.

“Should the inflation pressure decelerate further allowing the US Federal Reserve to loosen its stance on the rate hike cycle, this would certainly be a positive for the market, coupled with the progressive reopening of China’s lockdowns, Mr Market may be blessed with more optimism.

“This is on top of the new-found political stability domestically and strong consumer consumption supporting the local economy. Besides, resumption of foreign inflow into our market following the new-found strength in ringgit and weakness in the US dollar against emerging currencies may be on the cards should a deep recession in the US not materialise,” he opined.

At current below-mean valuation, Lee suggested that investors should continue to position for 2023 searching for alpha ideas as we advocate the evergreen strategy of constructing a portfolio of strong risk-adjusted returns in the longer run.

“We believe value stocks should take centre stage in a quantitative tightening cycle while keeping the sector rotational play in check as excessive valuation may draw profit taking activities in the current environment.

“Hence, we advocate investors to focus on value stocks with a healthy cash flow generation and dividends that offer a compelling valuation that will grow and prevail under the current challenging environment.

“A reasonable valuation would, in turn serve as a buffer should there be any miss in earnings forecast due to the uncertain overall macroeconomic.

“Our ideas are focused on domestic-centric businesses, unique turnarounds, event-driven catalysts, and inelastic demand at low prevailing valuations,” he added.

Meanwhile, on the performance of Malaysia’s market in 2022, Lee noted that the lack of market liquidity this year was dragged by the lack of retail participation, risk-averse sentiment, unfavourable macroeconomic condition, and compounded by the resumption of IDSS.

“Both local institutional and retail investors stayed on the sidelines for most part of the year as sentiment was suppressed by the rising interest rate environment, on top of geopolitics and Covid-19 restrictions in China.

“Trading activity for the FBM 70 and FBM SC saw a clear down-trending effect from the lack of robust retail participation after two elevated years in 2021-2022. YTD total turnover (traded value) contracted by 6, 39 and 63 per cent for the FBM KLCI, FBM 70 and FBM SC.

“Meanwhile, trading volume for small- and mid-cap stocks were affected the most, with -54 and -32 per cent YoY contraction YTD as retail participation dropped to 26 per cent YTD from 37 per cent in 2021.

“Surprisingly, the big-cap space grew by 19 per cent as the trading volume was supported by net foreign inflows in 2022, with banks and the commodity related stocks highly traded,” he noted.

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