This article first appeared in The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023
RETAIL investors stayed on the sidelines for most of last year, the cautious sentiment continuing from 2021 when investors’ irrational exuberance started to taper off after the initial supercharged liquidity of Covid-19 loan moratoriums.
While eking out a profit was certainly more challenging for retail investors last year, things have turned more positive in the past few months — at least among the lower liners, judging by the indices.
Both the FBM ACE Market Index and FBM Small Cap Index have delivered returns of 13.2% and 11.3% respectively in the past three months, far outperforming the measly 0.4% gain in the FBM KLCI. As retail investors focus mainly on lower liners, it appears to suggest that retail investor sentiment has improved considerably.
Having said that, overall market trading activity has not shown a strong rebound, with RM2.03 billion in average daily value (ADV) recorded in the first month of 2023, according to Bursa Malaysia data.
In 2022, ADV fell 41.5% to RM2.1 billion, even though it was higher than the pre-pandemic ADV of RM1.9 billion.
As most analysts believe interest rates have peaked — or will soon peak — will more investors be flooding back into the stock market?
In a note early this month, AmInvestment Bank Research said the halt in interest rate increases in the US, coupled with the positive impact of China’s border reopening, is likely to lead to more positive investor sentiment in 2H2023, and consequently improving the securities market’s ADV.
Heads of research houses whom The Edge spoke to point to positive sentiment in the local market despite persistent selling by foreign investors since 4Q2022.
MIDF Research head Imran Yassin Yusof observes that market sentiment has improved on expectation that the US Federal Reserve will slow the pace of rate hikes, and ultimately settle on a pause.
Sentiment in big-cap stocks is less encouraging, however, because foreign funds have been selling off financial services stocks.
“As the index is mostly dominated by banks, we see a bit of a weakness or sluggishness in the FBM KLCI. Foreign funds had been buying big-cap stocks since the early part of last year, and are now probably [making] some tactical switch to other markets and sectors. For this year, what we have seen is that they have been buying more technology and energy stocks,” Imran tells The Edge.
On a more positive note, foreign investors have been net buyers of Malaysian equities with a net inflow of RM25.6 million so far this year.
Given the ringgit’s strength — some would say weakness — Imran believes local equities will continue to draw interest from foreign funds, despite the temporary profit-taking.
While retail participation is unlikely to return to levels seen in 2020 and 2021, Imran sees the momentum in lower liners continuing in anticipation of a pause in US rate hikes.
He says: “It will not suddenly evaporate, especially when the momentum picks up; then we might see increased interest after that.”
Victor Wan, head of research at Inter-Pacific Securities, argues, however, that participation by retail investors could be seasonal. “Looking at historical trends, they come in very strongly at the end and beginning of the year. A lot of them have really decoupled from rate hike concerns.”
Support from IPO market
Areca Capital Sdn Bhd CEO Danny Wong attributes the return of retail investors in part to the robust initial public offering (IPO) market.
“Last year was a bad year, so most investors were on the sidelines due to external factors such as the China lockdowns, US rate hikes, meltdown in the valuations of tech stocks, as well as unstable political situation before the general election.
“Right now, things have improved, as you can see some stability in the new government. On the external front, the change of tone by the US Fed with less hawkishness, coupled with China’s reopening, is a contributing factor to the improved sentiment.
“Based on all these factors, I believe 2023 will be a better year than last year.”
Given the brighter outlook and undemanding valuations, Wong expects retail investors will continue to flow in.
“A lot of small-cap stocks have come down; so, that should attract some value investors. But when prices normalise, they will look at others, such as value plays or big-cap stocks.”
Because foreign holdings of local equities are very low at about 20%, he does not expect a massive selldown ahead, as foreign funds may return when the political landscape becomes more stable, and structural improvements are mooted in the upcoming budget.
More liquidity anticipated, as interest rates have nearly peaked
Rakuten Trade head of research Kenny Yee expects greater injection of liquidity into the equity market, given that US interest rates have nearly peaked. “When things turn more stable, especially from the US side, then I think foreign funds will snap up blue-chip stocks.”
For small-cap stocks, he suggests investors take a look at new listings that are trading at fair valuations. Also on the radar are small-cap construction stocks, which have been on a downturn for many years.
Yee sees interest in new stocks remaining high this year, provided that their valuations are set at reasonable levels. More than 10 companies are in the pipeline for listing, including Oppstar Bhd, DC Healthcare Holdings Bhd, SSF Home Group Bhd and Mercury Securities Group Bhd.
Although US inflation remained elevated at 6.4% in January, Yee says it is still manageable and does not see the need for aggressive rate hikes this year. For now, he believes US rate hikes will have less significant impact on Malaysian equities.
Moreover, he says Bank Negara Malaysia is unlikely to raise the overnight policy rate (OPR) this year.
“Although consensus expects another rate hike to 3%, I don’t think so. If the central bank maintains the key rate, then it should be a positive for the market.”
China’s reopening: Boon or bane?
Now that China has reopened its economy, Inter-Pacific’s Wan believes foreign funds may not come in strongly to the Malaysian market.
“Some of the funds would probably go to China. Of course, some other markets are likely to provide more high-value propositions, which is why our market has underperformed regional peers,” he says.
So far this year, Malaysia’s FBM KLCI has been the top loser, with a negative return of 1.2%. South Korea is the best-performing market, rising 9.6%, followed by Taiwan (+9.5%), Japan (+5.4%), Hong Kong (+4.7%) and China (+4.4%).
Nonetheless, Areca Capital’s Wong is relatively positive on China’s reopening, as it could support Malaysia’s economic growth in the form of foreign direct investment.
Wan remains cautious on the local equity market, however, because corporate earnings are not expected to be very strong this year. As Malaysia is a highly export-based economy, it will be affected by the slowdown in the semiconductor and electrical and electronics segments.
“In terms of valuations, we are still quite okay, but earnings are not going to be fantastic. We need more structural reforms to the economy,” he says.
In addition, he says, there are concerns about the longevity of the unity government, especially with the upcoming state elections.
“So far, the government has not really implemented a lot of changes. So, I think people are waiting for more clarity as to how the new government will handle the economy.”
Wan has pegged the FBM KLCI at 14 times forward price-earnings ratio, translating into 1,550 to 1,570 points. For now, he sees some value in gaming stocks (non-number forecast operators) and food counters, with key market risks being slowing external demand and consumer spending.
“Right now, there are blanket subsidies, but I don’t know how much of that kind of support they can actually provide. Obviously, there will be sustained subsidies for the M40 and B40 groups.”
As for the overall economy, he says it is still acceptable for Malaysia to record 4% to 4.2% growth this year, given that pre-pandemic growth was only above 3%. Last year, the economy expanded 8.7%, following 7% growth in 4Q, owing to support from stimulus measures.
In regard to investment strategies, Imran recommends consumer and oil and gas (O&G) stocks.
“Even though there was a slight correction in oil prices, they have been quite steady around US$85 a barrel. With the stability in oil prices, we can see increased capex [capital expenditure] by oil majors, and that will benefit our O&G players. In fact, we have seen interest in O&G companies lately,” he says.
The energy index of Bursa Malaysia has risen 22% over the past three months.
Wong is slightly positive on the equity market this year, recommending banking and tech stocks.
“Banking is a proxy to the economy. But if you want something exciting, then go for tech stocks with strong fundamentals. Investors can also look at some new areas such as solar plays.”
In addition, he prefers tourism-related and automotive sectors.
Foreign investors look forward to ‘productive’ revised budget
The retabling of Budget 2023 by Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim will be keenly watched this Friday (Feb 24). In setting the economic direction for the year ahead, what policies and reforms can investors expect from the new government and how will these impact financial markets?
After the previous five federal budgets were announced, the FBM KLCI saw a positive return over the next one month, with even a 6.7% gain in 2020. That year, the benchmark index also recorded a 4.6% rise in the week following the tabling of the budget.
Last year, the FBM KLCI was up 2.6% a month after the initial Budget 2023 was tabled on Oct 7, although it slipped 1.7% in the week following the budget announcement.
But any controversial or unpopular measures could see a knee-jerk reaction in the stock market. This was evident after the government introduced a one-off prosperity tax, to be imposed on companies that reported an annual taxable income of more than RM100 million, in Budget 2022. For the upcoming budget, analysts are of the view that the unity government must present a business-friendly one in order to attract foreign investors.
Areca Capital Sdn Bhd CEO Danny Wong says populist budgets presented in the past three to four years were deemed “unproductive” in the eyes of foreign investors. “For example, you cannot keep giving out cash. We need certain incentives to attract foreign investors to boost economic growth.
“More specifically, I’m looking forward to the revival of the tourism sector to help consumption. We also need to have technology innovation, riding on the trade diversion from the US and China, then the pie will become bigger for us.”
At the same time, he is also hoping that Malaysia can play a bigger role in the environmental, social and governance (ESG) space as this could potentially attract some funds here. While the country is unlikely to see structural reforms overnight, there needs to be some effort to make the necessary changes, he adds.
As Malaysia’s national debt including liabilities has reached RM1.5 trillion, or more than 80% of its gross domestic product (GDP), Inter-Pacific Securities head of research Victor Wan is concerned about how the government will strike a balance in the upcoming budget.
“I don’t know how much room the government has. Also, the prime minister has already downplayed any prospects of introducing GST (Goods and Services Tax). So, with all of this, I don’t know where the money is going to come from. When you talk about reducing subsidies, that will obviously eat into the pockets of a lot of people. There will be some sort of austerity within projects that are not critical and these will be put on the backburner,” he says.
MIDF Research head Imran Yassin Yusof believes the consumer sector may be a key winner when it comes to the budget because of the potential continuation of assistance for the rakyat, which will support domestic demand this year.
On the construction sector, he is uncertain if the budgeted development expenditure will benefit the industry. Bursa Malaysia’s Construction Index has gained 5.6% since the tabling of the initial Budget 2023.
Nevertheless, Rakuten Trade head of research Kenny Yee is optimistic that the revised budget may benefit the construction industry on the back of more contract flows.
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