This article first appeared in The Edge Financial Daily on December 3, 2018

KUALA LUMPUR: There seems to be no respite for stock investors from the bearish pressure next year following the disappointing third-quarter fiscal 2018 results.

Some notable disappointments in the latest round of earnings came from the gaming sector, with casino operator Genting Malaysia Bhd and its parent Genting Bhd suffering their first quarterly net loss in a decade of RM1.49 billion and RM275.8 million respectively, and that of number forecast operator Magnum Bhd its first quarterly net loss since its 2013 corporate exercise amounting to RM70.51 million.

Things were no better for the telecommunications sector, where an impairment loss on its network assets dragged Telekom Malaysia Bhd down to post its first quarterly net loss in a decade, amounting to RM175.59 million.

Meanwhile, the volatile commodity price plagued corporates, specifically the slump in crude palm oil (CPO) prices which impacted plantation counters while lower crude oil prices continued to be a bane for the oil and gas sector.

Given this scenario, where do investors put their money in 2019? It will boil down to one’s own risk appetite, said Public Investment Bank’s (PublicInvest) head of research Ching Weng Jin.

He is of the view that next year is going to be a challenging one, especially for those wishing to seek returns in Bursa Malaysia given the fact that there are still many uncertainties from an external standpoint.

“Generally, the Malaysian stock market may start to look cheap, but the uncertainties from external factors such as the US-China trade war and its effect on global trade still persists, and with Malaysia being an open economy, it will not help if the trade war escalates,” he told The Edge Financial Daily.

“Commodity prices have also been volatile. With Budget 2019 factored based on an oil price of US$70 (RM292.89) per barrel and given the government’s dependence on oil revenue, oil prices would be monitored quite closely.

“So, unless investors can stomach this kind of volatility from an external front, at least in the first half of 2019 (1H19), things are not looking too promising for the Malaysian stock market,” he said.

Ching qualifies that the decision to invest in the stock market boils down to investors’ sentiment.

“Ultimately, the decision to invest in the market is whether you feel confident or not, so if externally the sentiment is affected, people will not be too gung-ho about the stock market. However, if factors are conducive domestically then people will have reason to buy,” he said.

Looking at the FBM KLCI’s performance, MIDF head of research Mohd Redza Abdul Rahman opined that the benchmark index is being weighed down by the decline in CPO prices, which have fallen 24% year to date (YTD) to RM1,759 per tonne, coupled with negative news on the gaming and telecommunications sectors.

YTD, the KLCI fell 7% to close at 1,679.86 points last Friday.

“These factors are likely to continue to affect the KLCI’s movement in the near to medium term,” he added.

Silver lining amid gloom

There are some catalysts that may help spur the market next year, according to TA Securities chief investment officer Choo Swee Kwee.

“One is the restructuring of government-linked companies (GLCs), both in terms of management and shareholdings in listed corporations. For example, Khazanah Nasional Bhd last week pared down its holdings in IHH Healthcare Bhd and we probably could see a lot more [to come] in 2019 for companies under Khazanah’s stable as well as that of other GLCs, and this is not surprising as the government has said they should lessen their involvement in businesses,” he said.

Choo noted that restructuring in the power and telecommunications sectors could also provide some excitement for the stock market.

“The private sector could also see some foreign direct investments as a catalyst. One thing that the (US-China) trade war issue has highlighted to businesses is that they cannot just rely on one country for their factory because if anytime the US targets a certain country [on trade disputes], and your factory is there, you end up being caught.

“We probably could see some diversification of factories from China and other countries into Malaysia [if the trade war escalates]. Of course, Malaysia is not the only country to consider but it is a possibility due to the weak ringgit, which makes it cheaper for foreign investors.

“Bear in mind that Malaysia has [one of] the best infrastructures in place among Southeast Asian countries,” said Choo.

Inter-Pacific Asset Management chief executive officer Lim Tze Cheng is of the view that the announcement by the government in Budget 2019 that it will return RM37 billion in goods and services tax and income tax refunds to their rightful owners could be a positive indicator for the stock market in 2019.

“The tax refunds to me was the most significant item of Budget 2019. In the past the country had been reporting strong gross domestic product numbers, but the reality on the ground was that [businesses] were not doing well. At least now we have a clear picture of what is happening, meaning that there was RM37 billion that had been taken out of the economic system in the past,” he said.

“For a sizeable small to medium enterprise [for example], this could work out to an average of RM2 million in refunds, that had not been returned to them in the past.

“So to me the government releasing this RM37 billion back [into the system] is a very positive move as this would go back to businesses and spur their working capital, and the ripple effect of this would be significant, hopefully this generates back some interest in the stock market and spurs the banking and consumer sectors” said Lim.

Yesterday, Bloomberg also reported that US President Donald Trump and Chinese President Xi Jinping had agreed to keep their trade war from escalating with a promise to halt the imposition of new tariffs for 90 days as the world’s two largest economies negotiate a lasting agreement.

The truce between the US and China emerged after a highly anticipated dinner on Saturday between Trump and Xi on the sidelines of the Group of Twenty summit in Argentina. The leaders agreed to pause the introduction of new tariffs and intensify their trade talks, Chinese Foreign Minister Wang Yi was quoted as saying in the report.

Will Bursa ever return to the 1990s era?

According to analysts, investors should not expect the local bourse to return to the era in the early 1990s before the 1997 Asian financial crisis hit when the Bursa was a much more vibrant stock market than it is today in terms of investor’s interest.

Fortress Capital Asset Management director Geoffrey Ng pointed out that the 1990s was an era where market and investor sophistication was less developed than today.

“Retail investors at more than 50% of market participation [then] practised investing behaviour that favoured speculation and short-term price activity of stocks.

“With higher institutional activity currently, fundamental investing and more efficient information dissemination mean that stock prices better reflect their true fundamentals,” he said.

Brahmal Vasudevan — an active investor on Bursa who holds shares on the local stock exchange in his personal capacity, as well as via private equity firm Creador Sdn Bhd which he founded in 2011 and is chief executive officer — attributes the stock market vibrancy back in the 1990s to strong economic growth in the country which helped spur growth of the listed firms.

“Hence our markets were active, [but] this was probably also fuelled by some degree of speculation. As the country matures the total market may not be as exciting but within this there will always be new interesting stories such as Press Metal Aluminium Holdings Bhd and QL Resources Bhd which did exceptionally well in the last three years,” said Brahmal.

Where are the bright spots on Bursa?

PublicInvest’s Ching sees the banking sector as one of the few bright spots on Bursa next year. Banks recorded a decent performance earnings-wise in 3Q18.

“While the banking sector is seen as a proxy to the economy, but as long as there is no major blow up in asset quality, the sector’s earnings will continue to grow, albeit at a slower pace,” he said when asked whether the government’s forecast of a slower gross domestic product growth for 2019 could pose a downside risk to the banking sector.

“In terms of relative valuations, banks are quite cheap at 11 to 12 times compared with the broader market, which is at 16 to 17 times,” he added Ching.

MIDF’s Redza is also upbeat on the banking sector in 2019.

“The banking sector is likely to exhibit a decent performance. While there are uncertainties on the geopolitical front, consumer staples and discretionary will also likely see some resilience, hence their still higher price-earnings multiples seen now, [particularly] for the food and beverage and gloves [sectors],” he said.

Brahmal said Creador’s modus operandi on investing is to be “secular trend investors”.

“Therefore, we focus on sectors with long-term growth stories. We believe that sectors such as value retailing will be a great sector for 2019. Consumers are looking for value for money and companies which are able to address this trend will ultimately do well. One compelling story is a company we have invested in called MR DIY which will likely undertake an initial public offering in late 2019,” he said.

Disappointing corporate earnings have not helped valuations of the KLCI, which to a foreign investor is still an expensive buy at 18.5 times price-to-earnings ratio, a 54% premium to the MSCI Emerging Markets Index.

On the domestic front, things have not been any better.

Recall that former prime minister Datuk Seri Najib Razak had announced measures to boost lacklustre retail interest in the stock market in February this year including a six-month waiver of trading and clearing fees for new investors and exemption of stamp duty for three years for small- and mid-cap business.

But the FTSE Bursa Malaysia MidS Cap Index, which comprises small and medium companies with a market capitalisation of RM200 million to RM2 billion, has declined by 28% YTD, suggesting that the measures did not really have much of an impact.

It now remains to be seen if the new government can succeed in its plan to make Malaysia an “Asian tiger” once again where foreign investments start flowing into the country, and in the same breadth give the stock market a much-needed boost.