This article first appeared in Capital, The Edge Malaysia Weekly on November 6, 2023 - November 12, 2023

LIKE its regional peers, the Malaysian stock market has been affected by the strengthening US dollar brought about by the -250-basis-point gap between Bank Negara Malaysia’s overnight policy rate (OPR) and the US fed funds rate.

Year to date as at Oct 31, the benchmark FTSE Bursa Malaysia KLCI had declined 3.57% to 1,442.14 points. Among the Asean-5 economies (Indonesia, Malaysia, the Philippines, Singapore and Thailand), the KLCI is the second-best performer so far this year after the Jakarta Composite Index.

While the KLCI is defensive, the ringgit is not. The local currency is the second-worst performing one in Asia after the Japanese yen. The ringgit has depreciated 7.3% against the greenback so far this year, and it is currently hovering around 4.75 to the US dollar.

At its meeting last Thursday, Bank Negara’s monetary policy committee decided to hold the OPR at 3%. At the same time, the Fed kept its fund rate at between 5.25% and 5.5%.

Given that the 250bps gap between Bank Negara’s OPR and the fed funds rate will still be substantial, the ringgit is expected to stay low for longer. Furthermore, the market is expecting another 25bps hike from the Fed next month as its chair Jerome Powell has turned dovish, but he has also hinted that the door remains open for more rate hikes.

With both the local interest rate and currency likely to be lower for longer, keeping one’s money in the bank might not provide the best returns.

Fund managers and heads of research suggest that the local stock market has been undervalued compared to its historical price-earnings ratio (PER). As such, they foresee a rally before the year-end.

“From a PER perspective, the KLCI is more than one standard deviation below its five-year average. The local stock market is looking more attractive if you look at it from a price-to-book (P/B) [perspective], which is close to two standard deviations below,” Hong Leong Investment Bank (HLIB) Research head ­Jeremy Goh tells The Edge.

He says the market could experience some improvement before the end of this year from the traditional window dressing effect, and sees further improvement in 2024 as he expects the Fed to hold its interest rate hike.

“It’s a rather non-consensus view, but we do expect a 25bps rate hike in the OPR by Bank Negara next year. 

“For the Fed, we think its upcycle will likely end this year, but its rates could stay higher for a bit longer, perhaps till the second half of 2024, and could pivot before the US elections in November next year.

“The widening spread between the FFR (fed funds rate) and OPR should peak by year-end and hopefully start to ease off in 2H2024 — a narrowing FFR-OPR spread should be good for our market. Along with the eased political risk premium for Malaysia post the six state elections, we are hopeful for some market upside in 2024,” Goh adds.

Areca Capital CEO Danny Wong says a rally in the FBM KLCI in the fourth quarter of this year “is more likely”, despite lingering concerns around higher interest rates and the weakening of the ringgit against the US dollar. 

“The weakness in the ringgit has no correlation to the overall weakness to the broader stock market. There is not enough support in the local market from foreign investors due to the perception of the higher rates in the US,” he adds.

With the expectation that the Fed could end its historic rate hike, Wong reckons that Bank Negara will keep its OPR rate intact for the rest of the year. Last Wednesday, the Fed held interest rates steady in its current 5.25%-5.5% range, while chair Powell did not rule out another potential rate hike.

He expects corporate earnings growth to be better in the second half of this year compared with the first half, and this will be a catalyst for the market.  “Many companies have done cost saving exercises since the beginning of the year, which is likely to be reflected in their bottom line in the second half. We believe that the technology sector will make a comeback, especially companies that have exposure to the China market,” Wong says. 

In its strategy report released last week, AmInvestment Bank says there could be some upward traction towards the end of the year. It expects the benchmark KLCI to end the year at 1,515 points, which is pegged at a forecast price-earnings ratio (PER) of 15 times for 2023.

While the KLCI is trading at its five-year median PER level, it is at three standard deviations below the pre-pandemic median of 17 times, according to AmInvestment Bank.

Highly compelling dividend yields and year-end window dressing are also factors that will push the KLCI higher by the end of the year, it says.

“Our FBMKLCI 2024F earnings growth of +12.5% appears slightly more aggressive than consensus’ +10.4%.

“However, this still appears mild compared to South Korea’s +54% and Taiwan’s +21%, which are projected to rebound from -23% [and] -32% contractions this year,” AmInvestment says.

The government’s policies will be the impetus for the KLCI next year, leading investors towards sectors that are likely to benefit from new measures and policies, says Imran Nurginias Ibrahim, chief economist at BIMB Securities.

The government has launched the National Energy Transition Roadmap (NETR) as well as the New Industrial Master Plan. In Budget 2024, the government allocated development expenditure, albeit at a slightly lower figure, for the building of infrastructure such as public rail transportation.

“We are overweight on construction, healthcare, oil and gas (O&G) and telco. Construction sector’s growth will be fuelled by the government’s commitment to accelerate infrastructure development projects, as announced under Budget 2024 and the 12th Malaysia Plan mid-term review,” Imran tells The Edge.

The healthcare sector will continue to be driven by the increasing trend of inpatient admissions, as the weak ringgit helps boost health tourism, he adds.

IHH Healthcare Bhd, KPJ Healthcare Bhd, Sunway Bhd, TDM Bhd and Sime Darby Bhd are the beneficiaries of health tourism.

However, Sime Darby is looking for a buyer for its 50% joint venture stake in Ramsay Sime Darby Healthcare.

The Bursa Malaysia Construction Index has had a good year so far, trading 22.05% higher as at Oct 31, behind only the Bursa Malaysia Property Index, which ended 32.12% higher in October compared with the start of the year.

A bank-backed analyst who declines to be named points out that the Bursa Malaysia Construction Index is trading at a forward PER of 13.3 times, which is still lower compared with the historical PER of 15.5 times during the construction upcycle in mid-2017.

“While news of upcoming projects such as flood mitigation projects, the Penang LRT and phase 1B of Pan Borneo Sabah is likely to be partly priced in, there is still room for construction stocks to move higher.

“The improving operating conditions in the form of adequate labour supply coupled with manageable building material costs put contractors in a sweet spot to take on new projects which are expected to be rolled out in the coming quarters,” he says.

Besides a capacity shortage, crude oil prices are expected to remain elevated for a longer time due to the heightened geopolitical risks in Europe and the Middle East.

“Yes, O&G activities are likely to remain robust and not affected by weak consumer sentiment. We foresee oil prices remaining elevated on supply challenges amidst heightened geopolitical tension,” says Azim Faris Ab Rahim, BIMB Securities’ O&G analyst.

Brent crude oil price has averaged at US$82.68 so far this year, peaking at US$96.55 on Sept 27. While this is still far from the US$120 per barrel level seen in 2022, the World Bank Group has warned that crude oil prices could soar to US$150 per barrel.

However, that level can only be reached if the Israel-Hamas war escalates into a regional conflict in the Middle East.

“We think offshore activities will remain robust if oil prices can maintain above US$50 to US$60 per barrel,” says Azim. He is bullish on the upstream services as a whole, with top picks being MISC Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd and Velesto Energy Bhd.

Meanwhile, the government is encouraging investments in energy transition through NETR. As a result, renewable energy (RE) players such as Cypark Resources Bhd, Solarvest Holdings Bhd, Samaiden Group Bhd and to a lesser extent, Citaglobal Bhd, have seen their shares rally this year.

Year to date, Cypark’s share price has doubled to 98 sen, while Solarvest has rallied 48.54% to RM1.27. Samaiden has climbed almost 35% to RM1.08 and Citaglobal has gained 12.4% to RM1.64.

While RE has undeniably been a fresh catalyst on Bursa Malaysia over the past one year, analysts point out that NETR does not only benefit the solar energy producers or the engineering, procurement, construction and commissioning (EPCC) players.

“Construction players have been making their way into this space,” says the bank-backed analyst.

For example, Gamuda Bhd announced on Oct 30 that it would take part in a private finance initiative via a joint venture with Sabah Energy Corp Sdn Bhd and Kerjaya Kagum Hitech JV for a RM4 billion 187.5MW hydroelectric plant project.

“While details on the tariff are scarce, we view this to be positive as Gamuda could create another source of recurring income. The hydroelectric power plant would have an initial operating period of 45 years,” the analyst says.

Last December, Gamuda said it was acquiring a 30% equity interest in solar energy EPCC firm ERS Energy Sdn Bhd for RM200 million. ERS is its JV partner in NEDA Pekan Sdn Bhd, which is developing a 39MW solar power plant in Pekan, Pahang. The plant is expected to be completed by year-end.

After the acquisition, Gamuda has an effective shareholding of 64% in NEDA Pekan. The plant will operate under the New Enhanced Dispatch Agreement (NEDA) framework, which allows power producers such as RE producers to supply energy to a single buyer, that is, Tenaga Nasional Bhd, without entering into a power purchase agreement (PPA). This is seen as paving the path for the group’s medium-term RE goal of owning 800MW of RE assets for a new recurring income base.

Over at Malakoff Corp Bhd, the power producer last Wednesday said that it had signed a solar PPA with DRB-Hicom Bhd to develop, operate and maintain solar photovoltaic systems at 14 locations in Selangor, Perak, Melaka and Pahang.

According to the group’s statement on Wednesday, its subsidiary Malakoff Radiance Sdn Bhd had entered into the deal with 10 companies under the DRB-Hicom banner for the project, which has a total capacity of 20.78MW and total electricity generation of 26,546.45MWh per annum.

The independent power producer has also signed a memorandum of understanding (MoU) with ports under the MMC Group, with the aim of developing 500MW of solar projects worth RM2.5 billion over the next five years.

The MoU will explore potential through collaboration and undertake business exploration in various green power initiatives worth RM350 million.

However, a chief strategist with a government-linked investment company says there are long gestation periods for RE projects and it will take a while before those investments start yielding returns.

Furthermore, some analysts warn of the risks in large-scale solar projects, particularly if the costing is not accurate.

The chief strategist prefers financial stocks for 2024, as loan growth is expected to be healthy if the OPR remains at 3%.

“If there is an area that we can zoom into, financial counters will be it. A simple indicator would be loan growth,” he tells The Edge. He also considers financial stocks as defensive ones.

Kenanga Research in a sectoral note on the banking sector last week states that with a stable rate environment likely to be sustained in the coming months, it poses an opportunity for banks to recalibrate their profit rates and regain lost margins from past competition for deposits. “We also opine asset quality to be mostly unconcerning as most banks remain highly capitalised, albeit prepared to further load up on provisions if necessary.”

The research firm has CIMB Group Holdings Bhd as its top pick, as the financial group remains “one of the best-poised players to demonstrate above-industry growth thanks to their enlarging regional footprint”.

CIMB’s sizeable overlay relative to earnings presents handsome translations to earnings and special dividends, Kenanga Research notes.

It also highlighted AMMB Holdings Bhd for its current fundamentals that are highly supportive of healthier discussions for mergers and acquisitions, which have frequently been considered in the past. “The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate market share growth for the group should we anticipate better economic prospects in the medium term.”

For smaller-cap banks, Kenanga Research sees potential in Alliance Bank (M) Bhd (ABMB), as its high proportion of quality SME accounts has enabled the group to maintain one of the highest net interest margins among its peers. 

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