This article first appeared in The Edge Financial Daily on December 18, 2019 - December 24, 2019

KUALA LUMPUR: The New Year is expected to see the recovery in commodity prices with the crude palm oil (CPO) price to reach above RM2,400 and crude oil price to stay higher than US$60 (RM248.40).

According to MIDF Investment Bank Bhd, the stronger CPO price and firm crude oil will help fuel corporate earnings in the two sectors and will in turn lend support to share prices.

Speaking at a media briefing yesterday, MIDF head of research Mohd Redza Abdul Rahman said corporate earnings are expected to improve.

“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. It [the growth] will be more domestic-driven.

“For stocks under our coverage, we are [forecasting] about 5% earnings recovery in 2020 — driven by banks, plantations, oil and gas, and telecommunications — whereas the consensus is at 6.5% for the KLCI [constituents],” he said.

Mohd Redza anticipates the benchmark index to hit 1,680 by end-2020. The forecasts on the average crude oil price are US$65 per barrel and CPO at RM2,450 next year.

At the time of writing, the global crude benchmark was traded at US$65.15 per barrel, while CPO futures contracts for March 2020 delivery were last done at RM2,891 a tonne on Bursa Malaysia Derivatives.

The FBM KLCI closed 0.48% or 7.6 points up at 1,576.95 yesterday.

“Coming from a lower base, at about 1% this year, we expect [corporate] earnings to be better next year,” he said, adding that valuations will still be subject to macro and geopolitical uncertainties.

“The sectors that we see increasing [earnings] are the banks; the oil and gas companies which will continue to do better because oil prices are forecast to be at US$65 a barrel. We have also raised our call on the plantation sector from ‘negative’ to ‘neutral’,” he told the media.

Nevertheless, he stressed that the year-end KLCI target is at an implied lower end of its historical range price-earnings ratio of 16.5 times, to factor in external risks.

The external risks include the geopolitical scene, trade war, the European Union’s ambitious push against climate change, monetary policy expansion and interest rate.

He added that despite being one of the laggard markets among its peers this year, the KLCI is relatively in line with them when viewed from a two-year observation period.

Foreign fund outflow not a grave concern

Mohd Redza commented that foreign fund flow of Malaysian equities, which has recorded a year-to-date net outflow of RM11.69 billion as at last Friday, should not be viewed as a cause of concern as trading activities are in fact only marginally slower when compared to 2018.

He added that foreign shareholding levels in local stock market stood at 22.9% as at September, retreating only slightly from its March peak of 23.7%. The September level is comparable to that of 2017, which was a year of net inflow.

“Are there really not much activities in the market? I beg to differ. If you look at its volume, it’s only down 2.9% despite so much concerns over it,” said Mohd Redza.

On the economic front, MIDF forecasts a mildly moderated gross domestic product growth of 4.5% in 2020 versus 4.6%, supported mainly by domestic demand.

“The Malaysian economy will continue to expand at a slightly moderating pace of 4.5% in 2020, due to a combination of both global and domestic factors such as 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 said. Malaysia’s inflation rate, as measured by the consumer price index, is projected to average at 0.6% this year.

MIDF Research 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 4.20 by end-2020 and average 4.18 against the greenback.