This article first appeared in Capital, The Edge Malaysia Weekly on February 26, 2024 - March 3, 2024

POSITIVE market sentiment has fuelled the rally of the local bourse. The benchmark FBM KLCI has gained 6.7% year to date (YTD), outperforming the FBM Mid 70 Index and FBM Small Cap Index, which have risen 6.2% and 4.5% respectively.

Bursa Malaysia data show that both trading volume and value hit a peak last month, with 117.52 billion shares worth RM70.35 billion traded.

The market saw more interest in bigger-cap stocks in November last year, judging from the RM65.74 billion in trading value generated from the 81.39 billion shares changing hands. Similarly, the December data suggest that bigger-cap stocks were in the spotlight.

Will the blue chips continue to see buying momentum or will the mid- and small-cap stocks start to attract more interest?

Areca Capital Sdn Bhd CEO Danny Wong says big-cap stocks will continue to take the lead, with some being part of a rotational or thematic play. While some big-cap stocks reached their highs recently, he believes there are two things contributing to the higher valuations.

“One of the factors is that the current market sentiment can accept higher PERs (price-earnings ratios) and investors can take higher risks. The other factor is corporate earnings,” he tells The Edge.

After the interest in big caps, Wong expects to see more robust trading in the mid-cap space, particularly tech players and exporters.

“I’m bullish on the market this year, but it’s not a straight line because there is doubt whether it is a full recovery or just a one-off kind of rebound. If corporate earnings continue to show improvement, the recovery will be here to stay,” he says.

The head of a bank-backed research house who declined to be named says as long as market sentiment remains positive, investors should not be too worried about the rise in big-cap stocks.

“The foreign inflows are strong. I think it is due to the local environment getting better. There is more stability on the political front, with reforms and plans announced by the government. If big-cap stocks can hold their ground, then the momentum will spread to mid- and small-cap stocks,” he says.

He points out that management’s earnings guidance post-4Q2023 results will provide a strong indication of the market direction this year. Although Malaysia’s economic growth slowed to 3% year on year in 4Q2023, he observes that it may not necessarily translate into lower corporate earnings.

“Generally, there is a correlation between corporate earnings and GDP (gross domestic product), but there are occasions when divergence occurs. We are expecting earnings growth, but earnings itself is not a point of excitement. We need to see if corporate earnings will be revised upward,” he says.

Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong is of the view that foreign fund inflows may continue given the current low level of foreign shareholding. Furthermore, the FBM KLCI is trading at a 2024 PER of about 14 times, compared with the historical five-year average of 15.8 times.

“Foreign investors have been net buyers since November 2023, and the trend has continued lately. Usually, foreign investors would invest in liquid blue chips and, due to familiarity, stock selection would be those well-established companies such as banks and utility firms,” he says.

In the week ended Feb 16, foreign investors were net buyers of Malaysian equities — the fourth consecutive week. YTD, net buying by foreigners on the local bourse amounted to RM1.52 billion, while local institutions and retail investors sold RM690 million and RM830 million worth of equities respectively, according to MIDF Research.

As major central banks are expected to enter into the monetary easing cycle this year, Yong says emerging markets are likely to attract foreign funds due to expectations of a weaker US dollar. He adds that the Malaysia economy is expected to perform better this year than in 2023 on the back of improved exports and investments.

With the participation of local institutional investors, Yong notes that the mid- and small-cap segments are gaining traction.

“So far, market interest is in thematic plays such as property and construction stocks that will benefit from infrastructure development, favourable policies in certain states and the revised MM2H (Malaysia My Second Home) programme. The oil and gas (O&G) sector is set to benefit from Petroliam Nasional Bhd’s (Petronas) increased capex, while the energy transformation plan would benefit the solar sector,” he says.

Yong expects continued positive news flow in the near to medium term to sustain market sentiment. But key risks are negative developments in corporate earnings, political instability and volatility in major equity markets abroad.

Tengku Ariff Azhar Tengku Mohamed, officer-in-charge and chief operating officer at Maybank Investment Bank, observes higher institutional participation since 2H2023 and monthly foreign net buying since July 2023.

“In an institutional investor-driven market, the focus tends to be on big-cap and fundamentally driven stocks. Nonetheless, better market sentiment from ADTV (average daily trading value) and new IPO (initial public offering) launches have helped to build new following and expand interest among retail and high-net-worth investors.

“In addition, new thematic investments in Johor and Sarawak have contributed to the good volume over the past few months. Stocks that can attract both long-term institutional investors and short-term traders with their volume and volatility will bring more participants to the market.”

He points out that as the FBM KLCI has yet to fully recover from the Covid selldown in 2020, and the recent breach of the 1,500-point mark could attract more participants to the market.

“The performance of large-cap stocks and the index can provide sentiment support as the demand and interest is more broad-based. Our equity research’s end-2024 target for the FBM KLCI is 1,610 points, with the execution of macro blueprints and stronger corporate earnings in 2024 to lift the benchmark index.”

He adds that there is still ample liquidity to support the local market. “For instance, Bank Negara Malaysia data show that individual banking deposits grew RM35.9 billion to RM885.6 billion at end-December 2023 from a year earlier. By comparison, 2023 saw retail investors net sell RM964 million on Bursa. The potential is big if some of the individual capital can be redirected to the equity market.”

Ariff notes that key risks for equities are mainly external — including higher-for-longer US interest rates, widening of US-China geopolitical rivalry, escalation in the Russia-Ukraine conflict and Middle East instability impacting global demand and trade recovery, and China’s real estate sector flaring up and souring capital market sentiment.

For the bank-backed research house head, technology stocks are worth a look at the moment. “The tech supply chain in Taiwan and South Korea has been moving up with the artificial intelligence play, but Malaysia’s tech is still lagging.”

Apart from that, he thinks banking stocks “look interesting” despite the net interest margin (NIM) compression and peaking of interest rates. “Banks are not really aggressively competing for deposits. The NIMs will still be stable. Banks offer quite a decent dividend yield too.”

Areca Capital’s Wong sees upside potential in the plantation, O&G and consumer sectors. “Plantation stocks have not really moved a lot although they are up. This is given the stabilisation of CPO (crude palm oil) prices, cost management and the recovery of demand,” he says.

On O&G, Wong expects Petronas to continue dishing out more contracts, “which will benefit O&G services firms”, while on the consumer segment, he observes, “After the new year, I think consumer-related stocks will come back again.”

On the external front, the research house head says a delay in US interest rate cuts will be a negative for emerging markets. “When rate cuts are delayed, that means the US economy and US dollar are strong. This will affect foreign fund flows into Malaysia.”

Amid improved interest in the stock market and decent fixed deposit (FD) returns, industry experts opine that dividend yield play should be part of an investor’s portfolio.

Fortress Capital’s Yong notes that certain stocks with sound fundamentals can generate a dividend yield of 5% to 6%. “They offer some capital appreciation as well. Hence, we think those dividend stocks will remain attractive given the FD rates of about 3% per annum.”

While it appeared that FD returns were more lucrative than that of dividend stocks last year, Areca Capital’s Wong says investors should pay attention to some dividend stocks as he is of the view that FD rates may trend downwards this year.

“Even now, the FD rates are about 3%. I don’t think banks can continue to offer that kind of returns. Eventually, the cost of funding will be too high for banks. It will be too late if people don’t buy into dividend stocks. It’s timely to look at high-yield stocks and REITs (real estate investment trusts). It’s better to lock in the yield now as yields will come down when share prices go up.

“Some companies may start to relook at their dividend payout policy. They may resume the pre-Covid-19 payout ratio. After the pandemic, they were more stringent on cash flow. As it is already over, they may look at paying higher dividends.”

As investors are becoming more aware of the investment options available to them, higher rates from money market funds and FDs will increase expectations of dividend stocks to deliver performance, says Ariff.

Banks remain a good option for those seeking decent dividend yields. Among the top 50 companies on the local bourse by market capitalisation, RHB Bank Bhd has the highest dividend yield of 7.1%, followed by Malayan Banking Bhd (6.3%) and Public Bank Bhd (6.1%). Other high-yield stocks include Heineken Malaysia Bhd (5.6%), United Plantations Bhd (5.5%),  Sime Darby Bhd (5.3%) and KLCC Stapled Group (5.3%).

In terms of upside potential in share price, Yinson Holdings Bhd is the highest at 44.8%, based on the consensus target price of RM3.62 and last Wednesday’s closing price of RM2.50.

Kenanga Research says in a Jan 31 note that it continues to favour Yinson due to its strong FPSO (floating production storage and offloading) order book pipeline with multiple major FPSO jobs under the conversion stage, which will provide significant earnings growth in the coming years. Other supporting factors include its strong project execution track record and it being one of the first local O&G companies to invest in green technology, which will help with its long-term energy transition agenda.

Other stocks that could offer decent returns include Mr DIY (M) Bhd (34.4%), Hong Leong Financial Group Bhd (25.5%) and Dialog Group Bhd (24.5%), according to the consensus target prices compiled by Bloomberg.

Dialog’s share price saw the largest gain in almost 13 months after the company reported a strong set of financial results. Its net profit rose 16.62% to RM148.29 million in 2QFY2024 ended Dec 31, 2023, from RM127.15 million a year earlier, underpinned by higher contributions from its Malaysian and international operations. 

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