What to expect in 2016: A new year has begun and the question on every investor’s mind will be what to expect from the financial markets and Malaysian economy?
2015 was a tough year with falling oil prices, the weakening ringgit, domestic political volatility and uncertain monetary policy in major economies all contributing to a weak and unexciting economic environment.
Around the world, emerging economies and commodity-exporting nations felt the impact the most, and given Malaysia falls into both categories, it was hit with a double whammy. Last year marked the second year of capital loss for the FBM KLCI which ended the year 3.9% down year-on-year.
According to UOB Kay Hian, it was only a domestic liquidity-led rebound that rescued the local bourse from being one of the worst-performing bourses, after it hit a low of 1,532 points in August 2015. Even then, the FBM KLCI was still unable to fully recover.
So will investors face a similarly challenging 2016?
Analysts suggested that things will only get slightly better, and even then, they are mixed by how much better it will get.
UOB Kay Hian said: “We continue to predict a less volatile year for Malaysian equities despite continuing concerns over the emerging markets and domestic consumption slowdown (yet to bottom out). Systemic risks are contained, 1Malaysia Development Bhd’s financial issues have been mostly addressed in the fourth quarter of year 2015 (4Q15), and we expect moderate foreign portfolio outflows at worst as investors embrace a less pessimistic scenario post the US rate hike.”
Kenanga Research, meanwhile, took a more pessimistic view. It said: “Upside could be limited as we see no immediate earnings re-rating catalysts. In fact, we are less optimistic over the growth prospect after the few rounds of earnings downgrades. For financial year 2016 estimates (FY16E), we only estimate an earnings growth rate of 3.9%, while consensus is looking at 6.7%.”
Hong Leong Investment Bank, meanwhile, said that it still views global concerns such as the volatile oil prices, US Federal Reserve’s interest rate hikes and uncertainty in China as being a key hindrances to recovery.
It said that domestically headwinds will remain particularly in the first half of year 2016 (1H16). These included the the oil price environment, concerns over a slowdown of gross domestic product (GDP) growth and a jittery market reaction to the retirement of Bank Negara Malaysia’s (BNM) governor Zeti Akhtar Aziz in April. All these combined are likely to keep investors on the sidelines.
Nonetheless, the research house does not expect these factors to cause a massive selldown as it believes that investors are now more familiar with Malaysia’s macro fundamentals, in particular the impact of low oil prices and the ringgit weakness.
It added that it expects 2H16 to bring more excitement as sentiment improves on the back of a clearer view on the oil market dynamics, the confirmation of a new BNM governor, the subsiding effect of the goods and services tax (GST) and the end of administrative price adjustments (such as toll and fare hikes).
Analysts’ strategy recommendations: UOB Kay Hian highlighted the following investment themes for the 1H16: high-dividend yield stocks, counters which will benefit from El Nino, infrastructure-related plays, and China investment-related stocks (those likely to see investment from China, such as construction and transportation).
For high-dividend stocks, UOB Kay Hian said it particularly likes those with “fairly defensive earnings bases. These included Maybank Bhd, JCY International Bhd and Carlsberg Brewery Malaysia Bhd, Berjaya Sports Toto Bhd, Gas Malaysia Bhd and Malakoff Corp Bhd”.
As for stocks which are likely to see heavy Chinese investment, the research house likes IJM Corp Bhd, Stone Master Corp Bhd and Sunsuria Bhd.
Hong Leong Investment Bank (HLIB) advocated a slightly defensive stance in the larger cap stocks in 1H16 in order to ride out market volatility.
It noted that some big cap sectors like banking and telecommunications suffered in 2015 and therefore their valuations have become more attractive. Furthermore, it believes the deployment of ValueCap’s funds into the market will provide support for share prices.
Investors are also advised to consider the export stocks. HLIB said: “Particularly quality export stocks that will deliver growth in the absence of strong US dollar catalyst. In this regard, it is crucial to differentiate companies that have unique exposure in growing markets or are going through restructuring to those that solely rely on translational gain of a strong US dollar as earnings driver.”
HLIB also suggested that if foreign funds were to return to the market, then stocks with higher beta would fall under their radar. While on a sectoral basis, the construction sector is likely to be the clear winner given the influx of jobs with a record level of contract awards expected in 2016, it added.
The research house also has an “overweight” call on the aviation sector as tourists return Malaysia and it expects a rebound in the power and technology sectors.
It said its top picks are among the big-cap stocks such as Axiata Group Bhd, DiGi.Com Bhd, Maybank Bhd, Tenaga Nasional Bhd and IJM Holdings Bhd. While small- and medium-cap picks are UEM Edgenta Bhd, Evergreen Fibreboard Bhd, Inari Amertron Bhd, Mitrajaya Holdings Bhd and Sunway Construction Group Bhd.
HLIB’s stocks to avoid are UMW Holdings Bhd and Pos Malaysia Bhd.
StockStalk: 2015 was a tough year for most sectors and companies in Malaysia and everyone from the companies to investors will be keeping their fingers crossed that things improve in 2016. Much will depend on the oil prices settling and the ringgit/US dollar rate stabilising as this will remove the volatility and allow some normalcy to return to the market.
So while there is unlikely to be a substantial improvement to either the Malaysian economy or financial market, at least there might be the return of some stability. Another potential catalyst includes ValueCap’s RM20 billion injection into the market. The money will be used to buy into undervalued stocks which in turn will shore up the market.
Investors should keep an eye out for undervalued stocks which have long-term growth prospects and good dividend yield as these are likely to come under ValueCap’s radar.
Furthermore, given that earnings are expected to be flattish it might be more prudent to focus on high-dividend yield stocks which will offer more stable returns. Attention should also be given to big-cap stocks which fell sharply in 2015 as there now may be the opportunity for entry at a cheaper price.
Recovery, should it come, is likely to be in the form of stabilisation rather than a marked improvement; as such this might be a good time to look for long-term investments versus quick gains.
Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.