This article first appeared in Capital, The Edge Malaysia Weekly on March 10, 2025 - March 16, 2025

THE FBM KLCI is in the red, down 4.24% for the year to March 3, amid concerns about corporate earnings growth in the face of a global trade war and the continued outflow of foreign funds from the local bourse.

In the light of the current market volatility, heads of research advise investors to continue taking shelter in defensive stocks.

“From our observations, banking stocks and REITs (real estate investment trusts) have dominated the outperformers of the market. In our universe, nine banks and five REITs have outperformed the FBM KLCI,” says Imran Yusof, director and head of research at MIDF Amanah Investment Bank.

“We believe this is due to the volatility of the market, which prompted investors to go to defensive sectors such as banks and REITs, in addition to the attractive dividend yields of 4% to 6% in these two sectors. This is in line with our view and recommendations for 2025.”

Foreign investors have been net sellers of Malaysian stocks this year, offloading RM2.2 billion worth of equities in February, following the RM3.1 billion in outflows in January. The bulk of foreign selling was concentrated in the utility, healthcare (gloves) and financial services sectors, amounting to 65% of the outflows in February.

The plantation sector was the best performer in February, while the technology sector was the worst, according to CIMB Securities in its Malaysia Monthly Wrap for February 2025.

Among the banks, Alliance Bank Malaysia Bhd (KL:ABMB) led the pack with a share price increase of 7.44% year to date as at March 3, outperforming the FBM KLCI by 11.68%. RHB Bank Bhd (KL:RHBBANK) was next with a share price gain of 6.64%, followed by Malayan Banking Bhd (KL:MAYBANK) and AMMB Holdings Bhd (KL:AMBANK) at 4.3%.

Public Bank Bhd (KL:PBBANK), Hong Leong Financial Group Bhd (KL:HLFG), Affin Bank Bhd (KL:AFFIN) and MBSB Bhd (KL:MBSB) lagged their peers in terms of share price movement, but still outperformed the FBM KLCI as at March 3.

Of MIDF Research’s coverage universe of 96 stocks, only 36 outperformed the main benchmark, while the rest underperformed, according to Imran. Most of the underperformers were in the consumer products and services, property and construction sectors, he says.

As at March 3, NationGate Holdings Bhd (KL:NATGATE) led the pack of underperformers among the top 100 stocks by market capitalisation on Bursa Malaysia, followed by glovemakers Hartalega Holdings Bhd (KL:HARTA), Kossan Rubber Industries Bhd (KL:KOSSAN) and Top Glove Corp Bhd (KL:TOPGLOV).

Technology and semiconductor-related players were among the worst underperformers, namely Unisem (M) Bhd (KL:UNISEM), Inari Amertron Bhd (KL:INARI), Malaysian Pacific Industries (KL:MPI) and Greatech Technology Bhd (KL:GREATEC). Companies in the consumer, construction and property sectors were also on the list of underperformers.

According to Imran, the underperformance of the property development and construction sectors could be due to their outperformance last year, which could have resulted in some profit-taking this year. In addition, the construction sector has been hit by some “undue” concerns surrounding the prospects of data centres following the restriction on artifical intelligence chips from the US, he says.

Meanwhile, BIMB Securities saw only 32 companies under its coverage, or 36%, outperform the FBM KLCI’s YTD performance of -4.69% as at March 5. Of the 32 stocks, only 11 saw a price gain of between 0.6% and 14.4%, while the rest were in the red.

Companies covered by BIMB Securities with the best performance so far this year were KPJ Healthcare Bhd (KL:KPJ), with a 14.4% increase in share price; followed by Time dotCom Bhd (KL:TIMECOM), with a 10.9% gain; and Al-Salam Real Estate Investment Trust (KL:ALSREIT), with a 4% rise.

The underperformers were led by Hartalega, whose share price declined by 45% YTD; Lotte Chemical Titan Holding Bhd (KL:LCTITAN), which was down 38.3%; NexG Bhd (KL:NEXG), which was 36.6% lower; and Dagang Nexchange Bhd (KL:DNEX), which dropped 36.6%.

According to BIMB Securities director of research Mohd Redza Abdul Rahman, three sectors showed resilience in these trying times — REIT, telecommunications and healthcare.

“We think the positive rental reversion coupled with high occupancy rate, supported by stable macroeconomic outlook, that is, the minimum wage hike and civil servant salary increases, have bolstered consumer spending,” says Redza, commenting on the outperformance of the REIT sector.

Of the top 100 companies on Bursa that have outperformed the FBM KLCI so far this year, REITs such as KLCC Stapled Securities (KL:KLCC), Axis REIT (KL:AXREIT), IGB REIT (KL:IGBREIT), Sunway REIT (KL:SUNREIT) and Pavilion REIT (KL:PAVREIT) are among them.

The stable interest rate outlook, which resulted in a healthy dividend yield spread over Malaysian Government Securities (MGS), also enhances the attractiveness of REITs, says Redza.

Malaysia’s economic resilience, especially the stronger consumer spending power on telecommunications services, as well as the defensiveness of earnings from fibre-related service offerings, support the telcos’ stable revenue and profitability. Furthermore, they offer attractive dividends, he adds.

Nevertheless, only Time, Telekom Malaysia Bhd (KL:TM) and CelcomDigi Bhd (KL:CDB) have outperformed the FBM KLCI so far this year, while Maxis Bhd (KL:MAXIS) and Axiata Group Bhd (KL:AXIATA) lag behind the benchmark index.

The growing demand for private healthcare services due to the rise in living standards, the demographic shift from the growing urban population and ageing population as well as increased demand for health and wellness tourism all contribute to the positive outlook for the sector, says Redza.

Ivy Ng Lee Fang, head of equities research at CIMB Securities Sdn Bhd, opines that earnings visibility of exporters, such as tech companies and glovemakers, is weak due to the global trade war.

“Local companies may be impacted by US policies or the slowdown in the global economy due to the trade war. This and the net selling by foreign investors contributed to the 4% decline in the FBM KLCI for the first two months of 2025,” she says.

Ng notes that the Bursa Malaysia Technology Index is the worst performing sub-index in the local market, having declined 22.2% YTD, followed by the Bursa Malaysia Healthcare Index, which fell 19.2%, due to the rubber glove makers.

“In view of the tariff uncertainties, we favour companies that have defensive earnings qualities, offer good dividend yields and/or offer specific catalysts either from a valuation or an event-specific perspective,” she says.

CIMB Securities maintains its end-2025F FBM KLCI target of 1,657 points, based on a price-earnings ratio (PER) of 14.7 times, which is 0.25 standard deviation (SD) above the mean.

“We are turning more cautious on the market in the near term owing to the rising risks of slower global growth, driven by the escalation of the global trade war, which could weaken earnings visibility for companies,” it says in the February 2025 Monthly Wrap.

Its top picks in terms of big-cap stocks are CelcomDigi, Gamuda Bhd (KL:GAMUDA), Hong Leong Bank Bhd (KL:HLBANK), AMMB, Farm Fresh Bhd (KL:FFB), RHB Bank, Tenaga Nasional Bhd (KL:TENAGA), SD Guthrie Bhd (KL:SDG), IHH Healthcare Bhd (KL:IHH) and 99 Speed Mart Retail Holdings Bhd (KL:99SMART).

Despite the high number of underperformers in MIDF Amanah’s universe of stocks, Imran says the recently concluded earnings season shows that the companies under its coverage are still robust. “Valuation is where we can see affecting the share price in the short term. We expect to see continued volatility stemming from external factors, such as US trade policies, geopolitics and direction of US interest rates. Therefore, we expect defensive stocks with good fundamentals to continue doing well.”

While the recently concluded earnings season did not alter MIDF Research’s overall outlook on earnings this year, the research house is reassessing its equity valuations for possible downgrades with a direct implication on its target prices for the FBM KLCI. MIDF Research has a year-end target of 1,800 points for the FBM KLCI, based on a PER of 15.9 times.

Meanwhile, Redza of BIMB Securities is optimistic about the short-term outlook of the stock market, saying that the “storm” arising from the uncertainties in US trade policy and potential escalation of a global trade war will subside and markets will see upside starting later in the first half of the year.

Some of the mitigating factors in terms of geopolitical risks include rising domestic consumption due to the recent civil servant salary hike and increase in the minimum wage to RM1,700 per month, realisation of domestic and foreign direct investments, rebound in re-export activities and the recovering tourism sector, he says.

With the uncertainties still prevalent in the global economy, Redza advises investors to take advantage of lower prices to accumulate shares of fundamentally strong companies as well as those with regulated earnings visibility.

“Look for value — strong domestic earnings, especially those with low debt, strong cash flow and solid management coupled with higher dependence on domestic earnings that are relatively sheltered from the downside risk of earnings downgrade. Companies operating in the highly regulated and high barrier to entry space will likely see minimal impact on the issues seen in the markets now, and generally will provide good dividend returns, for example, Tenaga Nasional, Telekom Malaysia and Time dotCom,” he says.

Redza also advises investors to stay defensive with companies that have good dividend-paying track records in times of uncertainty. This is because temporary corrections for companies with a resilient earnings model would likely result in a higher dividend yield to supplement “depleting” investment returns from capital gains, such as those in the utility, consumer staples, telecommunications and healthcare sectors, he says.

Besides being defensive with strong dividend stocks, high quality bonds as well as high quality REITs should provide a cushion against rough patches of the stock market, he adds. 

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