KUALA LUMPUR (Sept 4): RHB Investment Bank (RHB IB) Research said key risks for local equities include a weak ringgit/US dollar rate, the slower-than-expected pace of economic recovery in China, lacklustre corporate profitability, and the continued stability of the federal government.

In a strategy note on Monday, the research house said the recent round of downgrades have resulted in a 1.6% year-on-year (y-o-y) contraction in financial year 2023 (FY2023) earnings forecasts.

“With the brunt of downgrades mainly done for FY2023 forecasts, we now expect FY2024 earnings to grow by 7.7% y-o-y.

“At 14.5 times FY2024 P/E (price-earnings), valuations are not especially demanding, but not in bargain territory either. Re-rating catalysts include: i) The pace of implementation of the reform agenda, ii) gradual improvements in the global macroeconomic outlook, and iii) clearer evidence that the tightening of the US Federal Reserve’s monetary policy has run its course.

“While a core defensive stance is still preferred, market weakness should be seen as opportunities to gradually deploy cash hoards to add to equity positions,” it said.

RHB IB has "overweight" ratings on the bank, oil and gas (O&G), utilities, basic materials, non-bank financial institutions, healthcare and property sectors.

It made no change to its end-2023 FBM KLCI target of 1,500 points.

Reviewing the June quarter earnings, RHB IB said 48.5% of companies under coverage reported in-line earnings, while 38.5% missed estimates.

It said the misses-to-beats ratio improved slightly to 2.9, from 3.6 in the first quarter of 2023 (1Q2023). Just one sector (2Q2023: none) — gaming — exceeded expectations while seven (2Q2023: nine) disappointed, i.e. plantation, O&G, construction, healthcare, utilities, rubber products and basic materials. In absolute terms, the plantation, O&G, bank and rubber products sectors accounted for the most cuts in earnings estimates.

“Overall earnings estimates were cut by 3.4% for FY2023, from -3.1% previously, and 2% for FY2024, from -1.6% previously, stripping out rubber products.

“There were no changes in sector weightings following the conclusion of the June quarter results season,” it said.

RHB IB said large-cap component stocks did worse quarter-on-quarter after 37% of companies reported disappointing results (2Q2022: 22.2%).

It said earnings forecasts were cut by 3.3% for FY2023 and 2.2% for FY2024 — mainly from the plantation, O&G, bank and utilities sectors.

“The results of the bank sector — a bellwether — were mostly in line, with asset quality data remaining solid.

“Management guidance was unchanged from the preceding quarter, on the back of China’s macroeconomic challenges and limited forward visibility,” it said.