FBM KLCI tipped to hit new high of 1,907 points this year

PETALING JAYA: The FBM KLCI is expected to move to a fresh record high of 1,907 points during 2018, Inter-Pacific Research said, adding that the index’s recovery has been finally engineered by cheaper relative valuations vis-a-vis regionals peers as a result of prolonged lethargy even as other markets surged.
“Rising tide globally finally lifts the KLCI. Foreign sellers have been solidly net buyers for more than two months now and though KLCI gains are not quite V-shaped, some sectors will see fairly spectacular gains,” the research house said in its strategy report.
It said the local market’s forward price-to-earnings ratio (PER) valuation is expected to approach the post-global financial crisis peak of 15.92 times, which was last observed in Dec 2013, equivalent to a KLCI level of 1,907 points.
In 1H2018, Inter-Pacific said the KLCI will again tread higher in a series of rallies exhibiting modestly higher highs and modestly higher lows reflecting the view that a gradual recovery in earnings growth is setting in. At the currently expected pedestrian 5% pace of earnings growth for 2018, the 15.9 times PER ceiling will be consistent with a KLCI reading of 1,907.
“Over the course of 2018, we expect a modest further upside in the KLCI. Earnings growth over 1H2017 of 11% versus our expected 6.8% had allowed the KLCI to close 1H2017 at 1,763.67, bettering our expectations of 1,753 only on account of a last hour push. We believe that a genuine rethink by foreign funds of the relative appeal of this market is not yet at hand despite their abrupt about-face late last year. Malaysia’s foreign weightage in international investors’ portfolio is most likely only approaching market weight (neutral) levels in our estimation after spending a long spell being underweight,” it added.
Inter-Pacific said the doldrums that settled over exports of emerging economies dependent on commodities weighed on Bursa Malaysia more than any of the regional stock markets.

“Consequently, notwithstanding any recovery in crude oil prices, the KLCI has decisively lost a measure of its previous aura of appeal vis-à-vis regional peers. Funds will be right to be wary of rushing into the sector and potentially again paying a price again for participation in an overly crowded trade.”
The research house said it would have been happier to see the recent KLCI rally with prices concurrently moving in respect of CPO but that has not happened. It had hoped to see increasingly benefits flow from a secular climb in palm oil prices that will stretch for years as plantings eased back gradually after spiking between 2007-2012 in response to high CPO prices.
“Among the various sectors, the view we hold is that any boost to Malaysia’s domestic economy will be most palpable and broad-based if it came from the palm oil sector as price increases flow straight into incomes in a broad swath of the rural heartland of the country. Investor apathy towards plantation stocks robbed the KLCI of one leg any rally in the KLCI could have perched on.”