Rakuten bullish on local stocks

KUALA LUMPUR: Rakuten Trade Sdn Bhd is bullish on the performance of the local equity market, expecting the benchmark FBM KL Composite Index (FBM KLCI) to ascend from the current 1,760 points to 1,850 by year-end on increased foreign inflow of funds and improved corporate earnings.

According to Rakuten head of research Kenny Yee, the cheaper ringgit, which he said is still undervalued at the RM4.30 to US$1 mark, will serve as a catalyst in drawing inflows of foreign funds.

“The inflow of foreign funds so far has been encouraging, in line with monthly net inflows since January this year, which at present is a cumulative sum of RM10.6 billion. Though the momentum may have eased somewhat, we believe the pace should pick up towards the fourth quarter,” Yee told reporters at the release of Rakuten’s second-half market outlook.

The local equity market has gained ground this year after being subdued in the last two years. The FBM KLCI closed 2.83 points higher yesterday at 1,761.99 points. Year-to-date, it has gained 7.33%.

Corporate earnings are expected to grow by more than 6% year-on-year underpinned by the banking sector, which is expected to see an earnings growth of between 10% and 11%.

Yee said despite the apparent downturn in the housing segment, the banking sector is still seeing loan growth. So far experts have given mixed views on the equity market’s performance for the rest of the year. Rakuten has the most bullish projection, while the most bearish puts the FBM KLCI at 1,770 by year-end.

Sustained momentum for inflow of foreign funds in the next six months could also strengthen small and mid-cap stocks.

Mid-cap stocks, which have a market capitalisation of between RM300 million and RM1 billion, and small-cap stocks, categorised as those with a market capitalisation of below RM300 million, have a higher upside and are expected to outperform stocks with bigger market capitalisation, due to higher volatility. On initial public offerings (IPOs), Yee said he is still optimistic.

“We are still optimistic on the IPO (market). Sometimes, the valuation is the main debate. It all depends on the pricing of the IPO. If you look at the smaller ones, Advancecon has performed brilliantly. At the end of the day it boils down to the pricing of the IPO and the valuation, and of course the sector the company is in. I wouldn’t say in one go, that most of the IPOs will underperform,” he said.

Yee said the counters to look out for will be in the construction and manufacturing sectors.

Rakuten’s recommended picks for small and mid-cap stocks are Ajiya, Ahmad Zaki Resources, HSS Engineering, PRG Holdings and KUB Malaysia.

The online equity broker expects the ringgit to strengthen to RM4 against the dollar by year-end.

“We have done an analysis on the co-relation between the ringgit, USD and renminbi. (It is) safe to say that our (ringgit) movement is the closest to the renminbi’s movement to the USD, if we compare with other (currencies) like the rupiah. We expect the renminbi to strengthen definitely, as we all know renminbi has been included in the International Monetary Fund’s Special Drawing Rights. This should also be an encouraging sign,” Yee said.

Any positive movement on the renminbi will be positive on the ringgit, he said, adding that the restrictions on capital flight could help strengthen the Chinese currency.

The ringgit was marginally higher against the greenback to RM4.2815/2855 yesterday after closing at RM4.2820/2850 on Friday.