This article first appeared in The Edge Malaysia Weekly on June 19, 2023 - June 25, 2023

BENCHMARK index FBM KLCI could decline over the next 12 months, judging from the downward revision by analysts of the target prices of the top 15 counters on the stock exchange over the last six months.

Based on analyst recommendations compiled by Bloomberg, only four of the top 15 stocks by market capitalisation — Tenaga Nasional Bhd, CelcomDigi Bhd, MISC Bhd and Maxis Bhd — saw an upward revision of their target prices.

With a total market capitalisation of RM699 billion as at last Thursday, the top 15 stocks made up almost 73% of the total market capitalisation of the FBM KLCI of RM960 billion.

Banks have the highest weightage among the top 15 companies on the FBM KLCI, accounting for 26.7% of total market capitalisation. Malayan Banking Bhd (Maybank) alone makes up 10.8% of the market capitalisation of the index.

Not surprisingly, any movement in Maybank’s share price greatly impacts the FBM KLCI. It is worth noting that the target prices of the top four banks — Maybank, Public Bank Bhd, CIMB Group Holdings Bhd and Hong Leong Bank Bhd — have been revised downwards over the last six months.

According to analyst recommendations compiled by Bloomberg, at RM9.26, the target price of Maybank is currently five sen lower than where it was six months ago while Hong Leong’s target price is 59 sen lower at RM22.86.

The FBM KLCI has been the worst performer among major Asian stock indices so far this year, having lost 7.15% to 1,388.61 points. Singapore’s FTSE Straits Times Index is up 0.27% year to date while Hong Kong’s Hang Seng Index is up 1.31%.

The index’s performance could be attributed to the poor outlook having been priced into share prices of component stocks.

According to MIDF Research, foreign funds were net buyers of Asian equities for the sixth straight week as at June 9, with foreign investors net buying US$409.2 million worth of equities during the week.

But foreign investors continued to be net sellers of Malaysian equities for the eighth consecutive week as at June 9. During the week, foreign investors net sold Malaysian equities to the tune of RM443.8 million, according to MIDF Research.

“Such frequency of weekly net selling was last seen in May 2021, which may have been exacerbated by weak April 2023 Industrial Production Index data. Similar to the week before, foreigners net sold every day last week and they have been net selling for nine consecutive trading days,” says MIDF Research.

YTD, foreigners have net sold Malaysian equities for 17 out of 23 weeks, chalking up a net outflow of RM3.4 billion, the research firm states in a June 12 report. This indicates that foreign investors skipped the Malaysian stock market while buying other Asian equities.

An investment firm official, who declined to be named, says the diverging fortunes of the Malaysian stock market and its regional counterparts are due to structural issues in the former, particularly the high number of government-linked investment companies (GLICs) with large shareholdings in big companies.

“Since the largest companies are GLIC-controlled, the shares are generally held in the hope of dividend payouts,” says the official.

“Other large institutional investors also hold the shares for dividends, so when there are new developments in the global market, they don’t react. For example, the pause in rate hikes by the US Federal Reserve did not create much movement in the FBM KLCI.”

GLICs such as Permodalan Nasional Bhd (PNB), the Employees Provident Fund (EPF), Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Khazanah Nasional Bhd are large funds that manage wealth and public investments.

The dominant presence of GLICs in the Malaysian stock market has caused a distortion in share prices. For example, when foreign investors were net sellers of Malaysian stocks, local institutional investors were the net buyers, propping up prices.

In the week to June 9, they remained net buyers with a total of RM333.7 million. YTD, local institutional investors have been net buyers for 17 of 23 weeks with a total of RM3.12 billion, according to MIDF Research.

Despite its target price of RM9.65, Maybank’s share price has not been moving in that direction in the past month. Since May 19, when it closed at RM8.78, its share price has been falling, closing at RM8.57 on June 16.

This has been the scenario for the last six months. Maybank closed at RM8.71 on Dec 19, 2022. In the last six months, it had reached its highest point of RM8.86 on Jan 13 and lowest point of RM8.26 on March 16.

This is despite analysts calling a “buy” on Maybank. Of the 22 analysts who cover the stock, 11 recommended either a “buy” or a “strong buy” while nine called a “hold”. The highest target price was RM10.30.

However, it is worth noting that the analyst time frame for target prices is typically 12 months. 

Maybank’s fundamentals are still very good, with the current stock price providing a dividend yield of 6.7%, says the investment firm official. Maybank’s forward price-earnings ratio of 11 times, compared with a trailing 12-month PER of 12.2 times shows that the bank is under-appreciated.

The performance of Tenaga, the target price of which was revised upwards by 76 sen over the last six months, has also been muted, closing 1.18% lower at RM9.20 on June 16.

The stock’s consensus target price of RM10.49 means that at its current level, there is potential for a 14% gain over the next 12 months. Tenaga is also a stock that gives good dividends, with a yield of 5% based on its closing price of RM9.11 on June 15.

Just like, Maybank, Tenaga’s forward PER of 11.3 times, compared with its trailing PER of 14.9 times, shows that the counter is undervalued.

“Apart from the high shareholding by GLICs, the Malaysian stock market has an added risk of political instability to it, which most of the developed Asian markets do not have,” says the investment firm official.

“As long as political instability is present, the Malaysian market will remain underweighted by foreign investors,” he adds. 

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