The aggregate reported earnings of the FBM KLCI component stocks came in at RM15.8 billion, slumping sequentially at 34.7% quarter-on-quarter (q-o-q) but edging up marginally by 3% against the corresponding quarter last year.
The underwhelming corporate earnings delivered for Q1 of the calendar year (CY2023) prompted research houses to reign in their optimism and lower forecasts for the index, which tracks the performance of 30 largest companies by market capitalisation.
Interestingly, the local bourse’s attractiveness, or lack thereof, was highlighted by economy minister Rafizi Ramli last Saturday.
He said the Malaysian stock market does not carry the same “lustre” as its regional counterparts, adding that the stocks that dominate Bursa reflect the country’s “past economic successes” rather than a promise of an exciting future for investors.
He stressed that if Malaysia’s stock market wished to lead the region again, structural reforms such as resource allocation to high-value and high-growth sectors as well as fiscal consolidation were needed to yield positive results on Bursa.
Weighed down by heavyweights
MIDF Amanah Investment Bank Bhd trimmed its aggregate FY2023 earnings forecast of the FBM KLCI constituents under its coverage by RM4.6 billion (-6.7%) to RM64.7 billion.
However, it maintained its end-2023 target for the FBM KLCI at 1,590 points or price-earnings ratio (PER) of 15.2 times.
This was largely due to downward revisions for heavyweights like Petronas Chemicals Bhd, Sime Darby Plantations Bhd, Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd.
MIDF head of research Imran Yusof told FMT Business the FBM KLCI is heavily weighted by the banks, which have seen selling pressure lately.
Meanwhile, Kenanga Research is projecting full-year FBM KLCI earnings to contract by 1.2% (from +10.5%) and has lowered its end-2023 target to 1,480 points from 1,610 points previously.
“The key causes of the poor showing are weak commodity prices, higher electricity tariffs and labour costs, as well as high-cost inventories eating into margins in the steel, automotive and grocery sectors.
“On a brighter note, banks demonstrated superb earnings resilience,” it said.
Hoarding liquidity
MIDF noted that “deposit competition” was the big highlight of the quarter. Banks attempted to hoard as much liquidity as possible in an uncertain landscape, and this led to double-digit net interest margin (NIM) compression across the board.
“As the US Fed is anticipated to pause either in the upcoming June or later July meeting, we can thenceforth expect to see some recovery in both the valuation and earnings expectation of banking stocks,” MIDF said.
Kenanga said the market will continue to face stumbling blocks in realising its full potential, a situation it has found itself in during the greater part of this year, thus far.
It expects the unity government to advance its policy reform agenda at a measured pace, considering the six state elections that will be held in a few months’ time.
Moving forward, the major risk for the local equity market is the onset of an economic slowdown. A global slowdown or recession, should it occur, will be a big challenge, said TA Investment Management Bhd chief investment officer Choo Swee Kee.
“The twin effects of slower demand and rising input costs (margin squeeze) could significantly impact corporate earnings for the rest of the year,” he warned.
Sectors to watch
Nonetheless, MIDF expects to see some improvement in both the valuation and earnings expectation of commodity-related stocks post-Fed pause.
Consumer retail as well as food and beverages should also see a stronger second half. “Most F&B manufacturers have successfully passed on increased input costs to customers through price hikes,” it said.
Affin Hwang Capital said with market volatility ahead, it prefers counters with strong earnings visibility and certainty.
The investment bank added Telekom Malaysia, Kuala Lumpur Kepong, Gamuda, and YTL REIT to its “Top 10 Buys” and removed Apex Equity Holdings, Axis REIT, and Gas Malaysia due to their earnings disappointment.
Affin Hwang said consumer names like DKSH Holdings, Aeon Co, and Bonia Corp saw positive earnings surprises backed by “resilient consumer spending”.
Mid-caps bright spot
While the market is lacklustre, the performance of mid-cap stocks appears to be a bright spot.
“Going forward, we expect the market valuation of FBM70 to improve further supported by macro and corporate earnings growth as well as end of interest rate tightening cycle,” said MIDF.
Compared to the big-caps, mid-cap stocks performed better so far this year both in terms of valuation and year-to-date price return.
MIDF maintained its FBM70 end-2023 target at 15,000 points or price-earnings-ratio of 18.1 times.