The research house today noted that the FTSE Bursa Malaysia KLCI (FBM KLCI) has been trading at a depressed valuation this year, at a price-to-earnings ratio (PER) of 12.8, in comparison to its historical average of 16 to 17.
The index was also one of only two global indices which MIDF tracks that has seen negative performance since January, which is -5.8% year-to-date (YTD). The laggard growth was compounded by the “reversal of investors’ interest in the financial, industrial product and services sectors.”
MIDF said that the reversal of interest in the financial sector was evidenced by the 5.7% fall YTD in Bursa Malaysia’s financial services index. They attributed this to profit-taking and Bank Negara Malaysia’s pause on interest rate hikes in January, which went against market expectations.
However, while the FBM KLCI has struggled, the research house noted that the FBM 70 and FBM Small Caps rose 2.1% and 0.9% YTD respectively in contrast. The FBM 70 index, which represents mid-cap stocks, has performed better than the FBM KLCI this year both in terms of valuation (PER: 15.5x) and price return (2.2%) respectively.
MIDF said they “expect nagging fears over the possibility of more bank failures to dampen investor confidence and heighten equity market volatility.”
This, they said, would reduce the possibility for valuation reversion of the FBM KLCI (to its historical range) with MIDF expecting the index to end 2023 at 1,590 points.
Notwithstanding the challenging environment that has hampered the FBM KLCI thus far in 2023, the research house said that they remain optimistic nonetheless.
“At the corporate earnings level, the consensus is still expecting FBM KLCI earnings for this year to register double-digit percentage growth,” they said.
MIDF also opined that banks could be a tactical dark horse for investors.
“We opine investors could tactically consider the banking sector given the recent price pullback.
“Furthermore, we expect that the banking turmoil will be contained, and Malaysian banks will remain robust. Besides, banks’ dividends will provide a limit to the downside risk during this volatile period,” they added.
The research house also poured cold water on the idea that the current banking crisis was analogous to the global financial crisis of 2008, denying that a contagion was looming at this juncture.
“The concern is that we are witnessing the start of another 2008-like financial crisis. We believe that this is unjustified.
“United States government bonds will revert to their original prices upon maturity, so any losses are temporary and central banks have reacted swiftly to contain the fallout of the US/Euro banking turmoil,” they noted.
With regards to the macro-economy, MIDF said that Malaysia’s economy would continue to stay resilient whilst navigating global financial headwinds.
“Considering the external headwinds, global financial market uncertainties and tightening monetary policy in many economies, Malaysia’s GDP growth is expected to moderate to 4.2% in 2023,” they said.
The revival of large infrastructure projects, further improvement in tourism-related activities and continued upbeat consumer spending were all reasons for optimism. This optimism is further backed by the largest ever development expenditure allocation tabled by the government last month – RM99 billion.
Moreover, MIDF expects Malaysia’s labour market to continue strengthening further in 2023 and 2024, mostly backed by momentum in the domestic economy.
“Malaysia’s unemployment rate is expected to decline further to 3.5% this year and return to pre-pandemic levels at 3.3% in 2024.
“And steady expansion in primary sectors, as well as construction and services, will prop up more employment opportunities next year,” they said.
The research house also expects the ringgit to continue strengthening against the US dollar – assisted by elevated commodity prices – throughout the year, reaching US$1 = RM4 by the year’s end.
“As a net commodity exporter (of crude petroleum, liquified natural gas and palm oil), it (Malaysia) stands to gain from the elevated global commodity prices and sustained trade surplus,” they noted.