High valuations, slow earnings in equity market

13 Jun 2019 / 20:53 H.

KUALA LUMPUR: The Malaysian equity market is seeing more expensive valuations and slower earnings growth compared with its regional peers, according to HSBC Private Banking managing director and chief market strategist for Asia, Fan Cheuk Wan.

“Within our Asia equity portfolio, we’re still cautious on the Malaysian equity market mainly because of its expensive valuations versus the other cheaper regional peers. The earnings growth forecast for the Malaysian equity market still remains at single-digit, lagging behind other higher growth equity markets that we favour, such as China.

“For Malaysia, we forecast single-digit earnings growth but with the valuation premiums versus the regional’s average, it would cap the upside potential of the Malaysian equity market,” she told a press conference on the HSBC Private Banking 2019 2H Investment Outlook in Asia today.

Reflecting on Asian equities, it maintains a mild overweight position on China and Singapore. Fan said Singapore is the cheapest market in Asean and it has the lowest price-to-earnings and the highest dividend yield.

“Based on our year-end forecast, we still expect the FBM KLCI to come in at 1,740 points this year, some modest upside potential because the economy still remains resilient and there will be modest earnings growth for this year. In terms of the upside potential, there are cheaper markets that can deliver more upside,” elaborated Fan.

Nevertheless, HSBC Private Banking chief market strategist for Southeast Asia James Cheo still expects a 3-4% upside in the equity market.

“How we want to play it is to look at the domestic sectors. The consumption and infrastructure plays are where we think the opportunities are, and how it pans out could be end of this year or next year,” Cheo said.

On the ringgit, he said in the near term, there could be a risk-off where there will be more demand for the dollar given the uncertain environment.

“The domestic economy in Malaysia is still resilient so it reduces the downside for the ringgit. The ringgit could still be fairly resilient against the dollar,” said Cheo, adding that its year-end target for the ringgit is RM4.30 against the US dollar.

On Malaysia proposing a new currency based on gold, Cheo said it is an interesting idea but noted that there are trade-offs and that it should be thoroughly considered.

“It’s an international monetary system and just can’t be implemented on a single country. It requires a global consensus. Given how things are, it looks like things are more bilateral nowadays.

”We have been on a fiat currency model for many years and it has served us well. Our money supply has been growing significantly,” said Cheo.

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