PETALING JAYA: MIDF Research is projecting the FBM KLCI to be at 1,700 points in 2021, which is at an implied price to earnings (PE) ratio of 17.5x which equates to 0.5 standard deviation above its 10-year historical average to factor in the expected recovery in the economy and improved investors’ sentiment.
It is sanguine over prospects for the Malaysian economy and the equity market next year on the back of the domestic demand-driven economic recovery, which will be supported by the expected availability of the Covid-19 vaccine and the resumption of corporate earnings growth.
The research house stated that recent developments point to a brighter outlook for the capital market in the near future.
Among the baseline scenarios that guide its outlook are: an ample liquidity situation but with an expected interest rate increase in the final quarter due to normalising price pressure, the end of the pandemic due to the vaccine development, no major untoward surprises over the true asset quality of the banking system, and a general election, if called, may not result in negative price actions post-election.
“We believe that these factors will affect investors’ sentiment positively leading to better performance of our equity market, and also our regional peers,” MIDF Research said in a report following its 2021 market outlook briefing today.
“The Malaysian economy is expected to rebound in 2021, growing by 7% year-on-year, based on the recovery seen so far and the prospect of successful containment of Covid-19 in the country and also key trading partners,” it said.
For the coming year, the research house anticipated inflation to be at 2.2% year on year supported by returning demand as the economy recovers.
The commodity sector is expected to see an improvement as global commodity prices are expected to be higher compared with this year’s levels and it forecast Brent crude oil price to average US$51 per barrel and crude palm oil RM2,700 a tonne.
“With the economy expected to recover and inflationary pressure to return, MIDF Research also expects Bank Negara Malaysia to undertake a rate increase by 25bps in the 4Q’21 with the ringgit likely to appreciate further to US$/RM 4.04 by year end of 2020 and average at US$/RM 4.08,” it said.
In recapping 2020, MIDF pointed out that the FBM KLCI closed at 1,562.71 points on Nov 30, 2020, a 1.6% loss year to date; however, this masked the fact that it was a very volatile year.
Given that at the height of the panic fuelled by the Covid-19 pandemic and other headwinds, the index fell to its lowest level of 1,219.72 points on March 19, which translated into a 23.2% decline from the start of the year.
Meanwhile, the Malaysian stock market has seen a year-to-date outflow of RM24.02 billion but the research house believes this to be understandable given the current global situation.
In terms of months, it highlighted that the foreign outflow peaked in March as the global investing community was spooked by the declaration of Covid-19 as a pandemic by the World Health Organization.
“However, it has been on a downtrend since then and we expect that there could be a possibility of foreign inflows in 2021 especially with the recent appreciation of the ringgit.”
In the third quarter of the year, Malaysia’s gross domestic product growth shrank at a much lower pace of 2.7% year on year due to the resumption of economic activities in the country and elsewhere.
Comparatively, MIDF Research said, the country reported the largest fall ever in second-quarter 2020 as result of the pandemic induced slowdown.
However, it observed deflationary pressures this year on the back of low oil prices and slowdown in economic activities, while the ringgit appreciated against the US dollar to RM4.069.
