KUALA LUMPUR (July 1): Fears of an economic slowdown in the US has dampened investor sentiment in most Asian markets including Bursa Malaysia, where the benchmark FBM KLCI has fallen by 7.4% so far this year and lost 10.32% of its value since its recent peak of 1,618.54 on March 3. 

Investors’ concerns follow the US Federal Reserve’s determination to continue raising interest rates in its bid to check inflation, resulting in the slowdown.

Nevertheless, some local market experts are of the view that the Malaysian market will stage a rebound, following the recent selldown. They said the battered market has fully priced in the negative developments, including the impact of hefty rate hikes on the US economy and Wall Street.

“We believe the market will stage a gradual rebound in the 2H22, as we approach the peak of US inflation cycle owing to a high base-effect, coupled with a hefty correction of commodity prices in recent weeks,” Affin Hwang Asset Management deputy head of equity David Loh told The Edge.

Noting that the FBM100 index has fallen by 8.42% this year, Loh said the local market has largely priced in the possibility of a slowdown in the global economy.

“While recession fears are real, we think it is important to note that different regions are in different stages of the economic cycle. Specifically for Malaysia, we have just embarked on full reopening and early signs are extremely encouraging, with a strong uptick seen in consumption and mobility,” he said.

TA Investment Management chief investment officer Choo Swee Kee concurred with Loh’s view on the recovery of the local market and US inflation tapering off in the second half of the year.

“We are looking at recovery and rebound in the 2H22, which was supposed to happen in the first half this year but did not due to global events. Unfortunately, our Malaysian market has been a laggard and was caught when global markets corrected,” he said.

He said the Russia-Ukraine war and high inflation worries in the US and European markets served as a speed bump for the local bourse.

Inflation, he said, should ease in the second half as global trade normalises with China resuming supplying to the world. Also driving his optimism is the possibility of the Ukraine conflict coming to an end and China stopping its zero-Covid policy.

Affin Hwang Asset Management’s Loh said key events to look out for in 2H2022 would be the upcoming US inflation data which would confirm whether the country has reached an inflection point.

Besides potential ceasefire talks between Russia and Ukraine, there is also a need to monitor other geopolitical developments such as China’s 20th Party Congress in 4Q2022, that may see changes in the top composition of the party.

Despite the prevailing subdue sentiment on the local bourse, Rakuten Trade Sdn Bhd vice-president of equity research Thong Pak Leng believes prevailing low valuations and a relatively steady economic outlook should see foreign funds returning to the country in 2H22.

“We should see these foreign funds providing the much-required liquidity in the market. We anticipate the FBM KLCI to possibly touch 1,670 by year-end premised on a very reasonable 13.5 times CY2022 PER (price earnings ratio),” he said.

Thong said Bursa Malaysia’s performance has been immensely impacted by global uncertainties, primarily from the US. Currently, the KLCI’s PER is at an estimated 14 times for 2022, representing a discount of more than 20% from the five-year historical average PER of 18.4 times

The FTSE Bursa Malaysia Mid 70 Index (FBM 70) and FBM Small Cap Index (FBMSC) are also significantly lower than their five-year average, with FBM 70’s PER at 15.1 times against its five-year average PER of 83.6 times, and FBMSC’s at 8.4 times versus its five-year average of 69.6 times, he added.

Choo, meanwhile, noted that the current market correction has presented a good opportunity to accumulate stocks. 

“Investors are able to pick and choose good stocks at much lower levels and at more reasonable valuations. We have cash in our portfolios to start nibbling at selected growth stocks and oversold stocks. We expect inflation concerns to level off in the second half of the year and the situation in Ukraine can change for the better anytime, just as suddenly. No war and no market downtrend can last forever,” he said.

Choo named the oversold technology and tourism-related sectors and undervalued banks as his top pick stocks.

Loh agreed that now is a good time to deploy cash as “value has emerged” after the heavy market rout this year.

However, given the intense volatility, he advocated a nibbling strategy with the focus on stocks with strong earnings trajectories driven by quality management.

Loh’s top pick sectors are banking, consumer and gaming.

“The banking sector is an obvious pick, being a direct proxy to economic growth. Healthy loan growth, impending rate hikes and better asset quality will contribute positively to the bottom line of banking stocks this year.

“On top of banks, we favour reopening sectors such as consumer and gaming as share prices are still a long way off their peak, despite posting strong results this year. We believe earnings will improve further and surpass the pre-Covid level soon, underpinned by a full reopening of borders,” he said.