KUALA LUMPUR: Rakuten Trade Sdn Bhd’s research team is positive on the outlook for the Malaysian stock market in the second half of 2017 (2H17), and expects the FBM KLCI to reach 1,850 by year end from about 1,761.99 yesterday, indicating a potential upside of about 5%.
“The third quarter has traditionally been a slower quarter and it should be a good period for investors who are positive on the market to accumulate,” Kenny Yee, head of research of Rakuten Trade, said in a media briefing on the 2H17 outlook yesterday.
Valuation-wise, Yee said while the FBM KLCI may not be exactly “alluring” with an average price-earnings ratio (PER) of about 16 times, foreign investors are still likely to take advantage of the country’s relatively cheap currency, which is anticipated to strengthen against the US dollar going forward.
The net inflow of foreign funds in 1H17 was about RM10.6 billion, and while Yee agreed that the momentum had subsided, he expects the pace to pick up towards the last quarter of the year.
“Recall that over the last two years before 2017, the foreign outflow from the country had been quite prominent, and our market’s performance had been rather subdued as a result,” he said.
According to Yee, the ringgit (MYR) could retest the 4.00 level against the US dollar (USD) after strengthening to about 4.30 this year. He said the optimism behind the local currency is mainly due to the strong correlation between the ringgit and the yuan or renminbi (RMB).
“Since MYR/USD has the closest correlation to RMB/USD, any positive impact on the renminbi should likely be positive on the ringgit.
“Recently, the Chinese renminbi has been added by the International Monetary Fund to the basket of currencies that make up the Special Drawing Rights, which could see more interest in the RMB,” Yee said.
Yee said the yuan has been on a decline in the last few years, mainly due to outflows from China as corporate giants from the country have been going for acquisitions globally. With Beijing stemming outbound direct investments, it will also curb outflows and be beneficial to the yuan, he added.
The ringgit, meanwhile, will also benefit from prospective solid foreign direct investment from the Chinese government, which is estimated at about RM240 billion and could be even higher if the Bandar Malaysia deal materialises.
Another driver of Rakuten Trade’s positive view on the equity market is growth in corporate earnings. Yee said corporate earnings for FBM KLCI constituents are expected to grow further this year at an average 6%, following a 4.7% improvement last year.
“The better corporate earnings could be underpinned by the banking sector. Loan growth in the banking sector is expected to be between 5% and 7%. So, things are not as bad as it seemed,” he added.
Yee also shared that Rakuten Trade’s focus is on the small- and mid-cap space, and there are more upsides for the smaller-caps, which usually have a higher beta, denoting higher volatility, than their FBM KLCI counterparts.
He also said the FBM Small Cap Index is trading at an average PER of about 13 times currently, while there are small-caps trading at a single-digit PER, indicating that there is still value to be found.
Of the small-caps, Rakuten Trade highlighted Ahmad Zaki Resources Bhd and Ajiya Bhd as its top picks with a target price of RM1.42 and RM1.10 respectively. Yesterday, Ahmad Zaki and Ajiya edged lower to RM1.11 and 83 sen, giving the two companies a trailing PER of 18.6 times and 11.2 times respectively.
Sector-wise, Yee said construction and manufacturing are worth looking at.
Though bullish on the equity market in general, Yee cautioned that investors should take note of developments in the US market.
“I think that the biggest risk is the US market, with the unwinding of the balance sheet going to take place soon. We are talking about US$4.5 trillion, so there should be some impact on the US market.
“If the US market collapses, we will definitely see a knee-jerk reaction globally. Malaysia will not be spared from this, but I think it will be temporary. Eventually, investors will need to invest and Asia is where the growth story is,” Yee said.