KUALA LUMPUR: Earnings growth of the 30 stocks that form Bursa Malaysia’s benchmark index may be stronger next year than what is seen so far this year.
This, according to MIDF Research, increases the prospect of the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) inching up from its current sideways performance.
In its 2017 outlook report released yesterday, the research house said the FBM KLCI’s valuation was mostly cheaper than its regional peers.
Additionally, the index’s longer term trend path is highly dependent on the expected earnings growth performance during the next 12 to 18 months, it added.
“Therefore, premised on the rooted behaviour whereby earnings and price are trending broadly hand-in-hand, we reiterate our next year’s FBM KLCI target at 1,830 points which equates 2017 price-earnings ratio of 17.1 times,” it said in its 2017 Outlook: Uncle Sam’s Power Play report.
MIDF Research expects sectors such as aviation, plantation, construction, port, healthcare, shipping, insurance, technology, oil and gas and utility (power) to trend positively.
It is “neutral” on the automotive, real estate investment trust (REIT), consumer, glove, media, technology, property and telecommunications sectors, while “neutral” with “positive” bias on the banking sector.
The index constituents’ earnings growth is expected to improve in line with rising construction activities, stabilising crude oil prices, coupled with favourable macro growth outlook.
It will further improve from an estimate of 5.4 per cent year-on-year growth this year to 7.5 per cent year-on-year next year, said MIDF Research.
The anticipated current and forward year growth pace is in stark contrast to the recessionary earnings performance of between 2013 and next year.
Taking a sneak peek into next year, MIDF said there is a possibility of one rate cut in overnight policy rate (OPR) and inflation rate to be at 2.8 per cent, slightly higher than 2.3
per cent this year that can be attributed to higher pump prices next year.
“The financial market was shocked by the one rate cut by Bank Negara Malaysia in July this year, which we had expected to happen in September. However, the reason behind the cut remains unclear, whether it was a pre-emptive move due to the early signs of risk on the local economy or it was seen as the natural rate for OPR, as both the median and average historical OPR is at three per cent.
“If it were the former, than there is a higher possibility of another rate cut next year, while if it is the latter, than there is a likelihood that the OPR will remain at the current level. However, at the moment we are maintaining our one rate cut scenario in the interquartile of
next year by 25 basis percentage points.
On inflation, MIDF Research forecast of 2.8 per cent is based on expectation the RON95 averaging at RM1.95 next year, based on US$50 (RM224) per barrel forecast.
At the same time, it expects the weakening of ringgit to play a role in imported inflation.
The oil prices and ringgit are likely to remain flat overall with some degrees of volatility, it added.
“The possibility of an election (GE 14), the paradox of demand and supply of oil and uncertainties of United States fiscal and monetary policy are likely to lead both ringgit and crude oil into a roller-coaster ride.
“However, we expect the overall movement of the two would be flattish with upward bias, with our ringgit year-end forecast at RM4.20 and oil price at US$50 per barrel on average next year.”
MIDF Research said optimism on the US economy will not bode well for the ringgit as it had led to massive capital outflow from emerging market economies, including Malaysia.
With Malaysia’s economic growth expected to slightly rebound next year, based on the prospect of a stronger trade activities, there is the possibility of countries with strong purchasing powers to lean more towards imports substitution.
“However, at the moment we remain optimistic with the better exports performance and hence economic growth next year.”
China’s relatively stronger momentum will also continued to be seen next year although concern lies with the likelihood of successful imports substitution.
“If its imports substitution plan becomes a reality, our exports activities will not be able to ride along China’s economic momentum. However, at the moment we remain optimistic with the E&E (electrical and electronics) sector and maintain our expectation that it will lead to a better exports performance and hence economic growth next year,” said MIDF Research.