Banking sector to spur corporate earnings in 2015

PETALING JAYA: The decline in oil prices since late 2014 and the slide of the ringgit continues to be a major risk on the country's economy. In less than three months, the government was forced to revise its Budget for 2015 with gross domestic product (GDP) growth projection scaled down to 4.5%-5.5% this year from the initial forecast of 5%-6%.
This is no surprise as the oil and gas (O&G) industry accounted for roughly 20% of the country's GDP.
In 2014, The FTSE Bursa Malaysia KLCI (FBM KLCI) was the worst performer in the region mainly attributed to the failure by corporate Malaysia to deliver in terms of earnings growth and its high market valuation.
So far this year, The FBMKLCI charted a 1.62% gain (up to Feb 12) despite the persistent foreign funds outflow.
BIMB Securities Sdn Bhd's head of Research Kenny Yee said while the local market valuations, in comparison to regional peers, is not exactly alluring, it is still not at excessive levels.
For 2015, he estimated earnings to grow by 9% unlike in 2014 where earning are expected to decline by 0.6%.
This, he said, will offer the support for the FBM KLCI "provided corporate Malaysia does not disappoint again."
"In fact, we are seeing buying opportunities to appear on the local bourse despite persistent foreign selling," he told SunBiz.
Yee, who kept his target for the FBM KLCI for 2015 at 1,860 points, was neutral on the market for 2015 and sees the banking sector as the main driver for corporate earnings growth.
"Therefore it is of utmost importance that the banks are able to deliver this year otherwise more downgrades would be in the offing.
"Despite the prevailing hype and concerns on the O&G sector, we see some trading opportunities within the sector due to recent share price slump especially for companies with solid earnings visibility and orderbook at hand," he said.
Among his top buys for 2015 are QL Resources Bhd, Dayang Enterprise Holdings Bhd, Kawan Food Bhd, Nestle Bhd and Digi.Com Bhd.
Between equities, bonds or fixed income, Yee sees no clear investment favourites.
"At the moment there are no clear favourites as most are already at the high threshold of their respective valuation as interest rates remain a major determinant. However, the ample global liquidity may see investments leaning towards the equity markets," he said.
Yee noted that January 2015 had been good to regional equities thanks largely to the ailing Eurozone amid the abundance of liquidity within the global financial system.
"The pending onslaught of US$1.4 trillion from Japan QE plus the €1.1 trillion QE package from Eurozone will certainly boost equities over the short term but we see heightening risks over a longer time horizon for all major asset classes if and when these QEs are not administered properly and let us not forget the US$4.2 trillion still sitting in the Feds balance sheet.
"Meanwhile, with the global currencies also going haywire against the US dollar, we do not expect any revision in interest rates from the US anytime soon," he noted.
Since market volatility is to heighten in 2015, Yee expects foreign fund selling to be an ongoing process this year.
"Based on our estimate since 2011, despite the recent outflow there are still around RM11 billion of foreign hot money residing in the local bourse. Depending on the selling intensity, we reckon domestic liquidity will be sufficient to at least soften the impact," he said.
However, Yee expects foreign funds to make a u-turn back to Asia in due course since "Wall Street is now at its brim in valuation and that prospective earnings growth may be negatively impacted by the high US dollar as an estimated 50%-60% of earnings from the DJI Average constituents are derived abroad."
"Meanwhile, Eurozone is still enduring a confluence of political and economic woes hence we do not anticipate Europe as the epicentre for any funds flow for the time being.
"In view of this, we suspect foreign funds to again target Asia as their preferred destination. Though Malaysia may not be on their priority list, the local bourse stands to benefit from some spillover effect," he said.