This article first appeared in Capital, The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

Director Of Strategy

UOB Kay Hian Malaysia

The year 2023 has been peculiarly sombre for Malaysian equities, falling almost 10% (in US dollar terms) in the year-to-November, with the ringgit ostensibly being the biggest regional laggard (-5.9%). Foreign ownership of Malaysian equities ebbed to below a 20-year low while the market endured three successive quarters of chunky earnings cuts through 3Q2023.

Externally, while we had correctly predicted 2023 to feature fewer black swan events, prominent surprises were the stubbornly high core US inflation through 3Q2023 and the eruption of the Israel-Hamas conflict. Nevertheless, global (Malaysia inclusive) equities surprisingly did not over-react to such dissonant events, including the failures of Credit Suisse and prominent US regional banks, and the intensified US-China trade discord and China’s property crisis. And, while the animal spirit hibernated throughout much of the year for Malaysian equities, there were melodic moments such as the run-up of property stocks (as “Iskandar 2.0” gained tempo), and the intermittent run-up in glove stocks.

Malaysian equities are well-orchestrated to deliver moderate returns in 2024 amid a less moody/volatile market, mainly to price in a dovish interest rate cycle in the US, as well as soothing domestic factors (stable politics, progressive economic policies, improved trading liquidity and a significant recovery in corporate earnings).

The main driver for global equity performance continues to be the global interest rate cycle as proxied by the long-term US Treasury yield, and we have observed the generally tight inverse correlation between the US long-term yield and global equity performances despite the emergence of black swan events (for example, Covid-19, Russia-Ukraine war) in recent years. Thus, the dovish outlook for global interest rates (led by the US Federal Reserve’s monetary policy) would be the key inspiration for equity inflows into emerging markets and the ringgit’s recovery against the greenback. We expect a 75-basis-point fall in the US federal funds rate starting from mid-2024 to precipitate a softening of the US dollar index, and conversely the strengthening of the ringgit.

On the domestic front, Malaysia’s appeal and investability to foreign investors should also improve to reflect the Datuk Seri Anwar Ibrahim administration’s political stability and progressive new policies (such as major initiatives for Iskandar Malaysia, the New Industrial Master Plan 2030 and the planned loosening of the Malaysia My Second Home scheme) to woo back foreign investors .

Our end-2024 FBM KLCI target of 1,605 points implies 14.9 times 2024 earnings or -1.0 standard deviation (SD) to the historical mean price-earnings ratio (PER), and the fourth consecutive year in which the FBM KLCI is expected to end the year at below-mean valuation. Our FBM KLCI target has incorporated a valuation buffer against some risk of earnings downgrades. While downside risks still lurk, corporate earnings should still punch above the recent years of flattish earnings and substantially deliver our projected 11.2% earnings growth for the FBM KLCI in 2024, particularly considering that 2023 earnings were partly dragged down by a few one-off cost items.

However, the Fed’s “higher-for-longer” interest rate policy and high fiscal deficit imply that the US long-term rates would bottom out at still relatively high levels, and this could limit the potential upside for equity markets.

The livelier tempo for equities would also be in contrast, with an interim slowdown in domestic consumption, although we expect gross domestic product (GDP) growth to pick up to 4.6% in 2024 (4% forecast for 2023). The government’s planned rationalisation of the country’s hefty subsidies, new tax introductions (capital gains tax for non-listed companies, luxury taxes) and announced hike in the sales and service tax (to 8%, from 6%) could induce an appreciable slowdown in consumption and GDP growth for part of 1H2024. These measures, coupled with the prolonged weakness in the ringgit, are inflationary, which elevates the cost of living.

Risk-on strategy in 2024

We advocate a risk-on stance, and generally expect outperformances by the higher beta stocks, valuation laggards and small-mid caps.

Compelling investment themes include:

*     Trade diversion (arising from the US-China trade war) and the semiconductor cycle global recovery, which prominently benefits the electrical and electronics sector;

*    Iskandar 2.0;

*    The Green Agenda, which creates opportunities for renewable energy (RE) generation/storage and electricity export to Singapore, electric vehicle (EV) infrastructure and formation of more data centres;

*    MYEG’s blockchain platform, which is linked to China customs;

*    The plantation sector and the unfolding of El Niño; and

*    China’s economic recovery and the mass return of Chinese tourists.

Other relevant themes include:

*    Rising returns on investment for oil and gas offshore asset (floating production storage and offloading and jack-up rig) owners; and

*     Recovery of laggard high yielders.

Some of these investment themes capitalise on key anticipated events in 1H2024, including the incipient year-on-year recovery of global semiconductor sales, Iskandar 2.0 developments (the anticipated creation of the Malaysia-Singapore special economic zone in January 2024), unveiling of details for the National Energy Transition Roadmap, the unleashing of Malaysia’s blockchain platform potential that facilitates exports to China, rising crude palm oil price, China’s economy gaining steam, and the award of mega projects (MRT3 and Penang LRT).

We are “overweight” the technology, gaming and plantation sectors. The building material sector is also expected to outperform in 1H2024, capitalising on China’s economic recovery, which should lift the pricing outlook of industrial metals. Meanwhile, the property, construction and glove sectors should provide selective trading opportunities.

The Malaysia research team of UOB Kay Hian Securities (M) Sdn Bhd assisted in this article

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