Less volatility expected in local equity market

KUALA LUMPUR: The local equity market, which is already seeing a pre-election rally, may not face as much volatility as it did during the 13th general election as the level of uncertainty shrouding the market appears to be smaller this time around.
Nomura Securities Malaysia Sdn Bhd Head of Equity Research Tushar Mohata said unlike the previous polls where uncertainty was aplenty surrounding the results – given the two corner fight between the incumbent and the opposition – the scenario appears to be quite different this time as no surprise verdict is expected, with Barisan Nasional expected to retain its mandate.
He explained due to the uncertainty over the election results in the previous polls, foreign buying was rife in the first half of 2013 while selling picked up in the second half of the year.
“We won’t expect a similar level of outperforming in the equity market (this year). There is less uncertainty … there is less of a trade in the market,” Tushar added. In line with that FBM KLCI is expected to close at 1,860 points by the end of 2018.
On the trend for inflow of foreign funds, which was positive in the first week of the new year, he said it is likely to continue against a backdrop of an appreciating currency. However, the tables could turn if the fourth quarter financial result of companies does not meet investors expectations, which could result in profit-taking.
The banking sector is not expected to see a sharp profit growth this year due to slower loans growth. Nomura’s sector picks for 2018 are aviation, gaming, hotels and leisure and consumer.
Tushar who recommended a selective approach for stock picks, chose CIMB Group Holdings, Public Bank Bhd, Tenaga Nasional Berhad and Sime Darby Plantation as top buys.
He also said that Bursa Malaysia might see a strong pipeline for initial public offerings this year but is expected to materialise after the elections.
Meanwhile, Nomura Southeast Asia chief economist Brian Tan said gross domestic product (GDP) is expected to remain solid at 5.5% this year against 5.8% in 2017, anchored by solid domestic demand as a result of a spillover effect of strong exports, which is expected to continue into 2018 driven by the electrical and electronic sector.
On monetary policy, Nomura is anticipating a 25-basis-point hike in the overnight policy rate this month due to financial imbalances.
Tan also said the government’s target of narrowing the fiscal deficit to 2.8% of GDP this year is within reach, on the back of a recovery seen in crude oil prices.
“We expect them (the government) to meet their 2.8% target helped by the fact the government’s budget assumption is very conservative. They are only expecting US$52 (RM208) per barrel whereas we are forecasting US$65 and it is at US$68,” he explained.
Tan said the pace of recovery of crude oil prices has exceeded the government’s expectations resulting in higher oil revenue. Coupled with reduced fuel subsidies, the fiscal deficit target is most likely achievable.
With elections around the corner, higher government spending is anticipated in the first half of the year but the trend is unlikely to continue after the elections.
On the ringgit, which dipped below RM4.00 to the dollar mark on Monday, Tan said the appreciation has defied Nomura’s expectations and is likely to continue to appreciate throughout the year.