Reforms headed in the right direction

PETALING JAYA: A resilient US economy and expectations of rate cuts by its Federal Reserve (Fed), China’s gradual economic recovery, plus the implementation of fiscal reforms locally, will continue to drive sentiment of the local equity market.

Tradeview Capital Sdn Bhd portfolio manager Ng Tzyy Loon is projecting a high single-digit to a low double-digit earnings growth for local corporations in the next 12 months. However, he said there are limited catalysts in the market contributing to the current trend of range-bound trading and sell-offs in certain sectors.

“The upside factors for the market will include improvement in the country’s gross domestic product which can help to bolster consumer sentiment.

“The progress in government-led infrastructure projects will also continue to support the local equity market. These are the catalysts that we think the market will see in the next six to 12 months,” he told StarBiz. The downside risks, according to Ng, are concerns on inflationary pressures and if the anticipated recovery of the ringgit is delayed. “At the moment, market expectations indicate a decrease in the frequency of rate cuts by the US Fed. Should the Fed delay slashing rates or the quantum of rate cuts is lesser than expected, it could lead to a postponed recovery for the ringgit, subsequently impacting inflationary trends,” Ng said. This comes as the United States consumer prices increased in March. Following the United States inflation data, financial markets expect the Fed to push back its rate cut to September instead of June. The market now expects two rate cuts instead of three initially. Ng said the gradual roll out of economic and fiscal reform initiatives will enhance the country’s credit rating, which will not only strengthen the ringgit but also attract more foreign fund flow into the market.

Year-to-date, the FBM KLCI rose 7% to 1553.51 points on Tuesday.

Rakuten Trade head of equity sales Vincent Lau notes that in the first quarter of 2024 large-cap stocks such as banks and airport counters experienced notable gains.

“The (local) market’s momentum is expected to persist with support from China, which appears to be at the start of its recovery, as evidenced by its industrial upswing in March.

“Additionally, the United States job market is still quite strong, reflecting the resilience of the country’s economy,” said Lau, who anticipates the local bourse to surpass the 1,600 mark by end-2024.

He expects Malaysia’s exports to pick up again mainly from the electrical and electronics sector that is driven by the artificial intelligence boom and data centres in Malaysia. The country is also benefiting from its position as a “China plus one” destination, he added.

“The crucial thing is that the ringgit has already bottomed out. At the same time, the government is also encouraging exporters and government-linked companies to repatriate their foreign earnings.

“The stabilisation of the ringgit also bodes well for foreign fund flows. While foreign investors remain as net sellers in the market currently, we expect this trend to reverse in the second half of 2024,” he said.He foresees the ringgit to strengthen to RM4.50 to RM4.60 against the US dollar by year-end. Tradeview’s Ng said vis-a-vis neighbouring markets, Malaysia remains an attractive destination for foreign inflows with its forward-looking corporate earnings growth and valuations.

While there are foreign funds investing in Malaysia, he noted they are “selective in their buying and not broad-based”.

“The market’s focus is on thematic plays like the setting up of data centres; developments in Johor and Sarawak, and the construction sector with the rollout of several infrastructure projects.

“Sector-wise, we are optimistic on the water-related sectors as reforms in this space are long overdue. Moreover, we are also looking at major themes such as the National Energy Transition Roadmap and large scale solar project developments, which we view as more sustainable ventures,” he said.Meanwhile, RHB Research said it was optimistic on the local equities outlook with corporate earnings having turned the corner and much of the bad news already priced in.

“Domestic economic reform initiatives are headed in the right direction and will be an important catalyst to attract and develop new sources of foreign direct investments . The Johor-Singapore Special Economic Zone holds great long-term promise.

“News flow remains positive with the ringgit having already bottomed out, setting the stage for stronger foreign portfolio flows,” the research firm said in its market strategy report dated April 9.

It has an end-2024 FBM KLCI target of 1,600 points based on a forward price-to-earnings multiple of 15 times.