Banking sector silver lining for stock market

PETALING JAYA: The banking sector could be a silver lining for the lacklustre earnings growth in the local stock market this year, according to analysts.
Alliance DBS Research said in a report yesterday that it sees the banking sector as a "dark horse", but much still depends on signs that its earnings downgrade cycle is finally over after kitchen-sinking exercises in 2015.
MIDF Research also sees potential upward earnings revisions in the banking sector, which could negate the effects from earnings revisions made to some index component stocks in the plantation and telecommunication sectors. Thus, the research house is maintaining its end-2016 target for the FBM KLCI at 1,800 points.
Generally, analysts opined that corporate earnings improved in Q4 2015, with MIDF Research noting that overall key earnings met its expectation for the second consecutive quarter after six consecutive quarters of disappointment.
The aggregate reported earnings of the current 30 FBM KLCI constituents totalled RM14.76 billion in Q4, higher than the RM11.77 billion in Q3, said MIDF Research.
Hong Leong Investment Bank (HLIB) Research said the Q4 reporting season recorded a further improvement, with 35% (Q3: 42%) of HLIB's coverage universe falling short of expectations while 27% (Q3: 12%) surprised on the upside. It said the improvement indicated that earnings deterioration has eased, and forecasts have become more realistic.
"The removal of macro risks after Budget 2016 recalibration, potentially better oil dynamics in 2H16 and the ongoing search for yields will make Malaysian equities attractive from foreign investors' point of view," it added.
Post reporting season earnings revisions, HLIB Research said, 2016 earnings per share (EPS) growth remains in positive territory, albeit at a slower pace of 3.9%, after two consecutive years of contraction.
"As for 2017 EPS growth, it has also been revised higher to 7.2% from 6.3%, partly due to lower base effect," it said.
PublicInvest Research said the oil and gas sector is the biggest casualty in terms of earnings misses as weak oil prices wreaked havoc on companies' earnings. Hence, earnings expectations for oil and gas players were lowered on concerns that the prolonged weakness in crude oil prices could dampen contract awards.
It also noted that prevailing economic weaknesses and elevated living costs hampered consumption spending, evidenced by the relatively poorer performances of the consumer and property sectors. The airline sector, meanwhile, is this period's surprise package.
"Nevertheless, we take encouragement in the fact that earnings hits (above and/or in line with) have now exceeded misses on a more convincing basis. The current count is 63% (hits) to 37% (misses) versus 58% to 42% as at 3QCY15 and 55% to 45% as at 2QCY15."
PublicInvest Research has retained "overweight" calls on the properties, plantation and power sectors, with selective exposure recommendation on the oil and gas and banking sectors as valuations of a few are increasingly attractive at current levels.
The research house said it is less enthused about export-related counters given its expectation of a stronger ringgit in the long term.
PublicInvest Research continues to advocate a trading-oriented stance in the interim, though any pronounced market weakness should be taken as accumulation opportunities.
AllianceDBS Research said although only 26% of its coverage universe reported negative surprises, 2016 earnings estimate for the FBM KLCI has been cut by 2.6%, largely driven by banks and telcos, which has more than offset the higher earnings of plantation stocks following its recent crude palm oil price forecast upgrade.
The research house continues to take a cautious stance on the market and maintains its year-end FBM KLCI target of 1,740 points in view of lingering earnings risks.
"Amid weakness in the domestic market, we continue to focus on three key themes for our stock selections: (1) resilient domestic earnings; (2) transport-related infrastructure spending; and (3) exporters with resilient external demand," it said.