Global indices generally saw a positive performance in 1QCY23 but concerns on banks almost undone it. FBM KLCI has been a laggard since the first month. One of the main drivers for the underperformance of the FBM KLCI was the reversal of interest in the financial sector and, industrial product and services sector.
MIDF in its 2Q outlook said it observed somewhat of a two-tiered market in Malaysia in 1QCY23, while FBM KLCI underperformed, FBM 70 and FBM Small Caps rose +2.1% and +0.9% YTD respectively.
Global growth is projected to moderate after the second year of post-pandemic recovery, but the latest PMI readings suggest there has been stabilization in global production activities. Although there are signs of easing price pressures as inflation has started to trend down, there is still concern that inflation will remain elevated.
The banking sector problem in the US and Europe had caused growing fears that the economy will be hit by the instability in the banking sector. However, regulators reacted quickly and managed to ward off negative trickle-down effects to other sectors.
At the current juncture, it appears the USD interbank market thus far remains sanguine the fallout on the overall banking system would be contained, i.e., no imminent systemic distress is anticipated. For now, the recovery in the market suggests the recent turmoil was short-lived. The Fed also hinted that 2023 will likely be the end of the rate increases because the FOMC learned that the recent banking turmoil also led to the tightening of financial conditions.
Considering the external headwinds, global financial market uncertainties, and tightening monetary policy in many economies, Malaysia’s GDP growth is expected to moderate to +4.2% in 2023.
FBM KLCI 2023 TARGET AT 1,590
In 2QCY23, the house reckons the ongoing developments in regard to the banking situation are expected to dominate investors’ attention and influence market sways. However, MIDF is maintaining its GDP growth target for Malaysia while at the corporate earnings level, the consensus is still expecting FBM KLCI earnings for this year to register double-digit percentage growth. At PER23 of 12.8, the FBM KLCI is currently trading at a depressed valuation.
However, the house expects the market valuation to revert higher in due course supported by macro and corporate earnings growth, the end of the interest rate tightening cycle, and no systemic distress in the banking sector. MIDF also, introduce its FBM70 end-2023 target at 15,000 points or PER23 of 17.5x
