Citi underweight on Malaysia equities

KUALA LUMPUR: Malaysia is seen as an underweight, according to Citi Research, due to its unattractive valuation, disappointing earnings revision, pressure from a rallying dollar, as well as the lack of a structural reform agenda.
Citi Research managing director and equity strategy regional head Markus Rösgen (pix) said the underweight call on Malaysia is aligned with the consensus that have been all year round.
"What pushes us away from Malaysia is its valuation at historical averages. It is no longer a cheap market. Earnings revisions have not been good in Malaysia and people tend to buy cheap stocks with improving revisions rather than disappointing revisions. The dollar strength and the impact on commodity will also hurt Malaysia more than it hurt other countries within Asia," he told a media briefing here yesterday.
Rösgen said markets that have inspired investors this year include India and Indonesia, for the new reform momentum they offer post elections in their respective countries.
"If you have an environment where people would perceive Malaysia as a structural reform story and a whole raft of reform agenda that would lift the rate of growth, then people would be happy to commit capital to Malaysia. Malaysia doesn't have that story for the moment," said the Hong Kong-based Rösgen.
He added that India and Indonesia are also economies that have large population, and Malaysia has to take on a reform story as population growth is not going to happen quickly.
On the Economic Transformation Programme, he said it would be met with a "high degree of scepticism" if it is mentioned that Malaysia has a reform programme at work.
"Scepticism is high, which can be good because you don't need to do a lot to surprise to the upside. But in conversations with investors, be it in Europe and America, no one tells me that I should be overweight on Malaysia because there is a huge reform momentum happening," said Rösgen, adding that perhaps more initiatives should be carried out by the Malaysian PR machine.
On a regional perspective, he is overweight on Asia due to cheaper valuations in countries like China, Hong Kong, Korea and Taiwan, its higher earnings revision, economic growth and more liquidity.
"From an earnings point of view, Asia's earnings are 30% higher today than they were at the peak before the global financial crisis, compared with Latin America which are 37% lower and Eastern Europe at 15% lower. Within emerging markets, Asia is the outperformer in terms of earnings revision."
He added that in terms of economic growth, by and large there are upside surprises in Asia than elsewhere.
On liquidity, Rosgen said the most consistent growth rate is in Asia, which has more current account surplus which is increasing, unlike in other parts of emerging markets. This is because Asia, which is a net importer of commodity, benefits from weak commodity prices.
On sectoral picks, it likes technology, banks, insurance and but it is not keen on energy, consumer staples, as well as oil and gas.