KUALA LUMPUR: Investment houses are turning bullish on Malaysia's equity market with policy reforms, data centre investment and infrastructure build-out as key tailwinds.
J.P Morgan in its research note said Malaysia's policy reforms highlights three compelling reasons to expect upward momentum in Malaysia's equity market to continue.
These are enhanced investor confidence due to political stability, growth in key sectors driven by comprehensive policy reforms, and strong commitment to sustainability and long-term competitiveness.
Malaysia is emerging as a bright spot in Asean with about nine per cent return year-to-date (YTD), the highest among Asean countries.
This is compared with the MSCI Asean which is down four per cent YTD.
J.P. Morgan said policy reforms, data centres investment and infrastructure build-out have become key tailwinds for Malaysia, in-line with its 2024 outlook, but are progressing at a much stronger pace than they anticipated.
"This, combined with deployment of domestic funds has led to a material re-rating of KLCI/MSCI Malaysia," J.P.Morgan said in its note recently.
Malaysia has seen incremental improvements in the financial account over the past 12 months, driven by a decline in net portfolio outflows combined with increased investment income repatriation.
"We believe a major factor for this is increased allocations to Malaysian assets by government-linked investment coprorations (GLICs), which are looking to allocate ~70 per cent of new investment domestically.
"Based on our back-of-the-envelope calculations, new investments from GLICs could inject RM2 billion monthly into Malaysia equities. This, combined with domestic funds deploying cash, partly drove Malaysia stocks up 9 per cent in 1H24," J.P. Morgan said.
Malaysia domestic funds have been a major buyers in the stock market over the past 18 months, bringing cash allocation down from about 14 per cent by Dec-22 to 6.4 per cent as of May-24, marginally above the about 5.6 per cent trough in Sep-23.
Analysts believe that a positive macroeconomic outlook and substantial progress in domestic reforms are expected to attract new foreign direct investment (FDIs) and maintain a stream of positive news, signalling enhanced business and investor sentiment.
"We have been constructive since the second half of 2023 (2H2023) and we are noticing more research houses becoming constructive on Malaysian equities.
"However, policy and earnings are likely to act as tailwinds for the market, while we expect currency to also potentially appreciate over the medium term," CGS International head of Malaysia Research Chehan Perera told the Business Times.
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said gross domestic product (GDP) growth and earnings move in tandem.
Since economic growth is likely to be better this year, Afzanizam said corporate earnings would likely mimic such dynamics.
"We have seen bursa indices for the construction, property and technology have risen quite substantially in 1H2024. And the price earning (PE) ratio for the FBMKLCI is currently around 15 times which is well below its long term average of 17 times.
"Our year end target for the FBMKLCI is still at 1,680 points reflecting further upside in the 2H2024.
"I'm quite sanguine about the Malaysian market especially when the Fed is expected to cut the rate in September which will narrow the gap between the Fed Fund Rate and overnight policy rate (OPR)," he said.
Noting the potential external risks, Afzanizam said the headwinds would be none other than geopolitics, especially the friction between the US and China, as Trump seems to have a better chance to secure his place as POTUS in November's election.
"Not to mention the risks of a US recession, given the signals from the bond markets due to the yield curve inversion since October 2022. So, it's very externally driven when it comes to downside risks," he said.
On the same views, Tradeview Capital Sdn Bhd vice president Tan Cheng Wen said in terms of economic outlook, consensus has been holding a positive view with aggregate projections for 2024 GDP growth to come in at 4.4 per cent and gradually increasing to 4.7 per cent in 2026.
Tan said fiscal deficits have also been projected to decrease from 5.0 per cent in 2023 to 3.3 per cent in 2026 with subsidy rationalisation and other measures put in place by the government.
"Investors/research houses have always maintained an optimistic view towards our equities outlook with many houses having projected a 1650-1700 target for the KLCI since the start of the year - and this has been pretty much unchanged throughout," he said.
However, Tan believes the current political stability has assuaged a lot of foreign institutional concerns on Malaysia's outlook and ability to implement and execute the many frameworks and blueprints that were announced in the past year.
"We are looking forward to the further implementation of domestic policies and economic friendly measures (e.g. New Industrial Master Plan 2030, National Energy Transition Roadmap, National Semiconductor Strategy) in the remaining half of the year with an eye on the budget in the later part of the year," he added.