This would represent a decline of 213 points or 13.7% for Bursa Malaysia’s benchmark index based on yesterday’s close of 1,553 points.
“The worst-case scenario from a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts translates to an end-2024 FBM KLCI target of 1,340 points,” it said in a recent strategy note.
On the other hand, the bank’s best-case scenario from an abrupt US Federal Reserve (Fed) policy reversal, stronger government rollout of domestic infrastructure projects and better-than-expected global economic growth would underpin an end-2024 target of 1,700 points, a 9.5% increase from yesterday’s close.
However, AmInvest maintained its base-case end-2024 FBM KLCI target at 1,550 points, roughly where it is today. This “conservative” base-case target stems from:
- An appreciating ringgit towards year end that could unravel foreign equity inflows attracted by the weak currency;
- Slowing global economic growth prospects;
- Less-optimistic expectations of the timing of Fed rate cuts; and
- Moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation, sale and service tax hike to 8%, and the high value goods tax of 5%-10%.
It said downside risks are mitigated by Malaysian equities offering below-median 2024F price-earnings (P/E) valuation of 13.6x, improving corporate earnings prospects, compelling dividend yields of 4%, and low foreign shareholding of 19.9% amid reinvigorated infrastructural rollouts by the government.
Impact of a strong ringgit
AmInvest, which sees the ringgit rising to 4.50 to the US dollar by year end, highlighted the potential impact of a strengthening ringgit on the local stock exchange.
“We note that the FBM KLCI has a strong negative correlation coefficient to USD-MYR of -0.65 to -0.75 for the past three to 10 years.
“A stronger ringgit towards the end of the year could mean a reversal in foreign equity inflows,” it said.
It also acknowledged that slower-than-expected US rate cuts could lead to persistent ringgit weakness and, consequently, volatile foreign equity flows for the rest of the year.
“As the ringgit marginally strengthened in March, the FBM KLCI slid 1% month-on-month as foreigners reverted to net selling of RM2.9 billion, more than erasing their purchases of RM2 billion in January-February,” it said.
Overshadowed by regional peers
AmInvest noted the FBM KLCI’s earnings growth prospects are “dwarfed by its regional peers”. It stated its 2024F FBM KLCI earnings growth of +13.3% was slightly ahead of Bloomberg’s +11.4%.
“Malaysia is dwarfed by Bloomberg’s estimate of +58% for Korea, +42% for Japan, +36% for Vietnam, +32% for Indonesia, +28% for Taiwan and +18% for the Philippines,” it said.
It also said foreign equity funds gravitated towards Korea (RM18 billion) and India (RM17.5 billion) in March while the Asean region experienced a net foreign equity outflow of RM7.8 billion compared to an inflow of RM4.6 billion in January-February 2024, leading to a year-to-date (YTD) outflow of RM3.2 billion.
The only Southeast Asian country that drew in foreign equity flows was Indonesia with RM2.4 billion, bringing YTD inflows to RM7.9 billion as the country enjoyed four consecutive months of inflows since December 2023.
Meanwhile, Malaysia’s YTD net foreign equity sales of RM869 million was eclipsed by Thailand’s RM9.1 billion and Vietnam’s RM1.9 billion.
On the local bourse, AmInvest said sector and stock selection will be key to relative outperformance given limited re-rating catalysts.
It remains “overweight” on the oil & gas, construction, technology, manufacturing, ports, power, property, real estate investment trust (REIT), glove and transportation sectors.
“We have replaced three of our top 10 picks with Hong Leong Bank, IOI Properties and Greatech Technology instead of CIMB Group, Mah Sing Group and Sunway as their share prices have reached near or above our fair values.
“Our other top picks are RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, IOI Properties, Yinson, and Pavilion REIT,” it added.
It also likes small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex.
“For dividend plays, we like REITS such as YTL Hospitality, Pavilion, UOA, Sunway and IGB as well as RHB Bank, Maybank, Paramount Corp, MBM Resources and CIMB Bank,” AmInvest said.