KUALA LUMPUR (Dec 17): The benchmark FBM KLCI is seen recovering from its current levels to hit 1,680 points by end-2020, supported mainly by domestic forces, said MIDF Investment Bank Bhd head of research Mohd Redza Abdul Rahman.

Mohd Redza told a press briefing here today the benchmark index will be driven by an expected recovery in corporate earnings and global commodity prices, which are expected to stay at profitable levels, although the year-end target is at an implied lower end of its historical range price-earnings ratio of 16.5x to factor in risk to earnings from concerns over external trade performances.

"Certainly, the export-oriented sectors are pretty much dependent on the global economy, hence we look at the commodity sector to drive most of the growth, as well as the banking sector.

"For stocks under our coverage, we are [forecasting] an about 5% earnings recovery in 2020 — driven by banks, plantations, oil and gas, and telco — whereas consensus is at 6.5% for the KLCI constituents," he said, adding that valuations, however, will be subject to macro and geopolitical uncertainties.

MIDF Research is forecasting Brent crude oil to average at US$65 per barrel and crude palm oil at RM2,450 a tonne in 2020.

The research house is also expecting Bank Negara Malaysia to undertake a 25-basis-point rate cut in the first quarter of next year, with the ringgit likely to depreciate further to RM4.20 by end-2020 and average at RM4.18 against the greenback.

"The Malaysian economy will continue to expand at a slightly moderating pace of 4.5% in year 2020, due to a combination of both global and domestic factors such increasing inflationary pressure.

"Inflationary pressure is expected to surge to 2.4% year-on-year mainly due to the government's petrol subsidy policy," Mohd Redza added.

When queried whether the KLCI, which has lost 7.33% year-to-date (YTD) to become one of the region's worst performing markets, has hit its bottom, Mohd Redza said fundamentals are showing otherwise.

"It is difficult to say whether it has [hit its] low because fundamentally we don't think so. We see some value emerging from the banking stocks, but prices are dictated by the demand and supply of the shares.

"At least, it's a comfort if you look at where our market is, the foreign shareholding level is still maintaining so there's still some confidence in our market, and rebalancing activities, especially of the MSCI, recently done in November show that there's still some interests in Malaysian stocks," he added.

Mohd Redza assured that there is little to worry about foreign fund flow of Malaysian equities, which has recorded a YTD net foreign fund outflow of RM11.3 billion, as trading activities are only marginally slower when compared with 2018.