This article first appeared in Capital, The Edge Malaysia Weekly on December 23, 2024 - December 29, 2024

CERTAIN sectors on Bursa Malaysia are expected to hit new highs in 2025, underpinned by the country’s progressive investment policies and good corporate earnings growth following the bout of uncertainties arising from the dovish US monetary policy and China’s improving economic momentum, say market experts.

“For 2025, we expect Malaysia to continue to attract foreign direct investments (FDIs) with a focus on manufacturing, renewable energy, data centres and technology services. With economic activities sustained into next year, we believe that the banking and financial sector will [also] do well. Similarly, construction and building material suppliers should experience a boom as more factories, data centres, utility facilities and power plants are needed. On the other hand, investors looking for value and recovery [might] focus on oversold technology and electronics manufacturing services (EMS) stocks,” TA Investment Management Bhd chief investment officer Choo Swee Kee tells The Edge.

Despite the many events that have affected the global markets in 2024, it has been a year of growth for the local bourse, and the market experts whom The Edge spoke to believe that the growth will continue next year even if there are temporary risks and uncertainties pertaining to external factors.

In the year to last Wednesday, the FBM KLCI was up 9.96% at 1,599.98 points after falling from a peak of 1,678.80 points in August amid a local play on data centre hype and infrastructure rollouts, as well as anticipation of interest rate cuts by the US Federal Reserve.

MIDF Amanah Investment Bank Bhd director and head of research Imran Yassin Md Yusof points to the construction, utility and property sectors as “expected performers” this year. “Diving into the quarterly performance, we could see similar patterns. For example, construction is the only one out of the top three that continues to perform each quarter. On the other hand, utilities had a good run in 1HCY2024 but started to weaken a little in the second half. Meanwhile, property performed well overall with a blip in the third quarter of 2024 (3QCY2024). Given that these sectors are mostly mid-caps, it is not surprising that the FBM70 is outperforming the FBM KLCI,” he adds. (See chart on sectoral performance index.)

According to UOB Kay Hian’s December regional strategy note released on Dec 5, the market sentiment should be supportive of small-mid caps and selected market laggards, in addition to promoted investment themes such as “new milestones in the Iskandar 2.0 region, data centre project rollouts, China’s improving economic momentum, trade diversion and the global semiconductor cycle recovery, the Green Agenda and opportunities in the National Energy Transition Roadmap (NETR) and blockchain”.

UOB Kay Hian also foresees trading opportunities in glove stocks, which will ride the US’ scheduled steep tariff hikes on China glove products, mergers and acquisitions (M&A) and potential dividend payouts.

Donald Trump’s upcoming second term as US president has been a cause for concern for the markets due to his tariff threats. Trump on Nov 25 announced his intention to slap “additional 10% tariffs on China” — a presumably less aggressive levy than the previously threatened 60% — along with additional 25% tariffs on Mexico and Canada, and indicated that the tariffs would be part of his first executive orders when he is inaugurated on Jan 20, 2025.

Responding to concerns of risks pertaining to Trump’s tariff threats, Kenanga Investment Bank head of research Peter Kong says: “We have been flagging that it will initially cause uncertainty, especially in the oil and gas sector. But in the longer term, we are with the majority thinking that it is going to help relocation plays or your usual +1 sort of play. We think the more interesting part for Malaysia is if China will respond to Trump, as we have already seen with recent chip sanctions. Any China catalyst may benefit Malaysia.”

It is noteworthy that the US will not be alone in its tariffs on Chinese imports in the new year. Canada has announced its plans to do so on a slew of Chinese products from as early as next year, while India too says it is likely to impose a temporary tax of up to 25% on steel imports to help curb cheap imports from top producer China.

“A cautious start to the year is anticipated, ahead of Trump’s ascension to US presidency, but we expect a post-Trump presidency market upward trend. Our optimistic scenario is premised on the assumption that the Trump administration, firstly, undertakes a pragmatic execution of trade policies which is not unduly disruptive to global trade and entrenches Malaysia as a ‘China Plus One’ manufacturing hub; and ends the highly inflationary Russia-Ukraine war,” says UOB Kay Hian.

Like many other research houses, UOB Kay Hian is “overweight” on the building material, property and construction segments. It also says it is selective on technology and glove counters as the latter is foreseen to ride the US’ scheduled steep tariff hikes on China glove products.

The research house also sees selective opportunities in the financial and oil and gas (O&G) sectors, with its top picks being Gamuda Bhd (KL:GAMUDA), Hong Leong Bank Bhd (KL:HLBANK), IOI Properties Group Bhd (KL:IOIPG), MyEG Services Bhd (KL:MYEG), Pekat Group Bhd (KL:PEKAT), Press Metal Aluminium Holdings Bhd (KL:PMETAL), RGB International Bhd (KL:RGB) and VS Industry Bhd (KL:VS).

Meanwhile, Kong notes that Kenanga turned positive on the plantation sector in early December from “neutral” previously on a tactical six-month view as it believes that the upstream visibility remains good. In a report, the investment bank’s research house noted its preference purely for upstream players with less volatility and more attractive valuations, such as Hap Seng Plantations Holdings Bhd (KL:HSPLANT), which offers good yields; Genting Plantations Bhd (KL:GENP) with foreseen limited downstream but firmer property contribution ahead; TSH Resources Bhd (KL:TSH), which has a longer term upstream expansion programme; and United Malacca Bhd (KL:UMCCA), which is expected to see rising profit from newly maturing estates.

“For larger players, IOI Corp Bhd’s (KL:IOICORP) downstream turnaround potentials along with its firmer upstream outlook is attractive, while PPB Group Bhd (KL:PPB) offers value-for-money exposure into the region’s growing consumer essentials (cooking oils, flour and sugar) [although] its earnings profile is the most volatile,” Kenanga’s report highlights. Its selective construction, property and healthcare picks are Gamuda, IHH Healthcare Bhd (KL:IHH) and Mah Sing Group Bhd (KL:MAHSING).

Kong notes that the first half of 2025 could be more domestic-thematic focused while the second half would see a recovery from more external facing shocks.

As for sectors that disappointed, some analysts point to the perceived prolonging of uncertainties in the development of the 5G network.  “Such issues did not instil confidence for foreign direct investment and the business environment,” remarks one of them.

MIDF Research says in a Dec 16 note: “Foreign investors continued to sell on Bursa Malaysia for the eighth consecutive week, with outflows totalling RM882.4 million, leading to the second-highest single-week outflow in the last six weeks.”

“While we do foresee continued growth prospects in the economy and equities market next year, we are cognisant of the potential downside risks, mainly stemming from external factors. The first US rate cuts initially buoyed the financial markets, but the US election results led to positive sentiment for the US markets at the expense of others. Nevertheless, we expect that the dust will eventually settle and rate cuts will provide support to the market, as per our base case. Hence, we expect markets to continue to be volatile in 2025. As such, we expect equity valuations to remain relatively stagnant,” says MIDF’s Imran.

Currently, MIDF Research has an FBM KLCI target of 1,800 points for end-2025 that is pegged to a price-earnings ratio (PER) of 15.4 times. UOB Kay Hian has the same target for the period.

“Moreover, expectation of further rate cuts by major central banks (namely the Fed and European Central Bank), together with additional stimulus (both monetary and fiscal) by China’s authorities should be overall positive to the world’s financial liquidity situation in 2025. Nonetheless, we continue to be mindful of potential externally driven downside risks to the 2025 outlook. As such, we expect equity valuation to remain relatively stagnant. So, for 2025, we have an FBM KLCI target of 1,800 pegged to a PER of only 15.4 times,” says UOB Kay Hian.

TA’s Choo does not provide the firm’s FBM KLCI target but says he expects 2025 returns for the equity market to match that of 2024. “We advise investors to invest cautiously and buy on fundamentals. Always diversify to preserve your portfolio value. For alpha performance, take position in companies from the sectors mentioned earlier that are expected to do well in 2025.”

Meanwhile, MIDF’s Imran urges investors to go defensive, at least until “a clearer picture of US policies and other geopolitical situations emerge”.

“Defensive stocks, such as that of banking, real estate investment trusts (REITs), utilities, healthcare and consumer staples, tend to provide consistent dividends and stable earnings regardless of the overall market conditions. This stability and attractive dividend yields should moderate the downside risks, while not discounting the potential for price appreciation due to undervaluation,” he says.

“We believe that the banking, REIT and consumer sectors will be a beneficiary of Malaysia’s economy, which is expected to continue growing (albeit at a more normalised pace). We like the consumer sector as a potential laggard play. Consumer staples, in particular, are currently trading at a compelling valuation of 22.7 times, significantly below the three-year forward PE average of 28.2 times, signalling a rare window of undervaluation,” Imran continues.

MIDF’s preference for the consumer sector is supported by “a stable labour market that continues to drive domestic consumption; sustained growth in consumer spending, buoyed by favourable private consumption and gross domestic product growth; a strong domestic consumption outlook, bolstered by various incentives introduced in Budget 2025; and improved margins for food and beverage producers, benefiting from declining global commodity prices and a stronger ringgit”.
 

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