MIDF Research maintains FBM KLCI target but warns of possible downward revision

12 Aug 2019 / 20:57 H.

PETALING JAYA: MIDF Research has reiterated its FBM KLCI year-end 2019 target of 1,720 points but warned of a bias towards downward revision based on weak corporate earnings and the US-China trade war.

“The US Fed is expected to be less aggressive in regard to its monetary stance this year which may be positive to emerging market currencies (including ringgit) as well as to commodity prices. Moreover, the slowing China’s economy may prompt more stimulus measures (both monetary and fiscal) by the local authorities with positive spillover effects to the broader region,” it said in its strategy report.

The research house said it is sanguine on the prospect of de-escalation in the ongoing US-China trade spat, as both parties are seen as seeking acceptable solutions to the dispute.

In Malaysia, the macro environment remains healthy with gross domestic product (GDP) growth estimated at 4.9% this year while corporate earnings growth are at circa middle single digit.

“All factors considered, our FBM KLCI year-end 2019 target remains at 1,720 points, pending the outcome of the ongoing 2Q CY2019 results season. And there is a bias towards downward revision, considering the increasing number of below consensus results seen so far and also heightened trade war and other geopolitical issues,” said MIDF Research.

In the first two months of the year, the benchmark index was on a gradual uptrend, hitting 1,731 points on Feb 21 before trending downwards thereafter. The year-to-date total overall market volume was higher by 3.6% at 2.64 billion shares a day compared to what was seen for the whole of 2018.

As of Aug 5, 2019, the FBM KLCI has lost 4.7% so far for the year amid continuing foreign net outflows affected by ongoing external developments, which are also impacting other global markets.

Earnings of the FBM KLCI are expected to grow by 6.3% year-on-year in FY19 as per Bloomberg consensus.

On Bursa Malaysia, nine out of 13 sectors recorded year-to-date gains with construction, energy and telecommunications leading gainers, advancing by more than 10%.

However, financial services, healthcare and plantation were major laggards, dragging down the FBM KLCI whose constituents and heavyweights are made up of seven banks.

“We noted that banking income performance in 1Q CY19 have been slightly muted due to net interest margin (NIM) compression. This came mostly from deposit competition and may be exacerbated in later quarters by the Overnight Policy Rate (OPR) cut,” MIDF Research said.

However, it believes that the issue has been overplayed and noted that the impact of the OPR cut to NIM will normalise as deposits were also repriced lower. In addition, the downtrend of expenses and low credit cost remain positive factors for banks.

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