Malaysian equity markets have started on an encouraging note but there has been questions on the key drivers and justification to CGS-CIMB aggressive year-end Kuala Lumpur Composite Index (YE KLCI) target of 1,755.
In its Strategy Note today (Jan 12), it said questions were raised since the publication of its 2024 Malaysia Outlook report titled “Multiple tailwinds support a comeback in 2024” on Dec 11.
“While the 3% gain in the KLCI over the first two weeks of the new year with several sector indices outpacing these gains is encouraging, there remains 17% to go to reach our year-end target,” it said.
Explaining its YE KLCI target, CGS-CIMB saw three headwinds that have affected equities all the way back from GE-14 in 2018 that could turn into tailwinds as we enter 2024.
“We remain constructive on equities. We recommend investors also focus on domestic driven laggards in addition to some sectors that have shown strong leadership,” it said.
Elaborating on its 1,755 target for YE KLCI, it said, despite the seemingly aggressive target, the KLCI traded, in fact, at just under 1,800 at the start of 2018 and experienced a healthy run-up to 1,895 over the first four months of that year prior to the 14th General Election, which was held on May 9, 2018.
“While there was a sense of euphoria surrounding the toppling of the Barisan Nasional government for the first time ever since independence, the market pulled back to a low of 1,664, or by 12%, in the ensuing two months as there were uncertainties on the policy
framework of the new administration.
“Confidence was regained for a brief period with the KLCI moving back to 1,826 by August 2018,” the research house said.
It added, thereafter, however, it was one slip-up after another with the country unable to hold on to a stable government (four prime
ministers over the space of five years).
“On top of inconsistent policy, the ringgit steadily depreciated from RM3.87/USD prior to GE14 to a low of RM4.79/USD in October last year
and KLCI/FBM100 earnings, before extraordinary items, for 2023 are estimated to be 14% and 19% below that of 2017, based on Bloomberg consensus estimates,” it said.
CGS-CIMB posed three questions or “ifs”: “As we move into 2024, what if the policy clarity seen since Jul 2023, pragmatic policies such as The National Energy Transition Roadmap (NETR), The New Industrial Master Plan (NIMP) 2030 and the potential JS-SEZ in Johor turns into improved execution and continuity?
“If the dollar index breaks down, potentially triggering a reversal in currency trends, particularly for surplus countries such as Malaysia that is also seeing healthy growth in domestic demand.
“And lastly, if there is a sustained pick-up in earnings following years of disappointment?”
While it may seem like a tall order, the research house’s base case is that all three “ifs” materialise, underpinning a KLCI recovery to closer to 2018 levels.
“Cumulative net foreign outflows of RM48.6 billion since Jan 2018 could reverse strongly, especially if our thesis on the ringgit also proves to be correct.
“At our 1,755 YE target, the forward PER is 15.4x, well within the 14-20x range that the KLCI has generally traded at since 2010.
“The challenge, however, is that the 16% expansion in normalised net profit that we forecast for our coverage universe for 2024 comes through as price is also very much a function of the “E” and not just the “PE”,” it added.
CGS-CIMB said, while it is encourage by the revival in market interest seen in the first two weeks of 2024, it believes that there is plenty of value still on offer.
“Earnings delivery for the broader domestic-driven sectors has improved from 2022 and the declines in profits for Plantations and Petrochemicals sectors and losses for Gloves sector were what caused the 8% drop in normalised profit in 2022 and likely slight decline in 2023, excluding which we estimate sector earnings grew a robust 20% and 16% in the respective years.
“Our heavy focus on domestic-driven sectors is intact. In addition to sectors such as Property, Utilities and Construction that have led the recent rally, we recommend focusing on laggards within Banks, Consumer Discretionary and Telecoms, among others.
“There are no changes to our top picks list of 20 stocks,” it added.
