Market Commentary

5 May 2015

Malaysia Equity Market

 

Francis Eng, Chief Investment Officer and Senior Director at UOB Asset Management (Malaysia) Berhad, shares with us his outlook for Malaysia’s equity market. 

1. What is your outlook for Malaysia’s economy? 
For 2015, he is looking for a GDP growth of about 4.8%, which is lower than the GDP growth of 6.0% recorded in 2014. The slower growth is because he expects consumption to moderate on the back of the implementation of GST. 

2. How much further upside is there for investors and are valuations still appealing? What about the earnings outlook? 
For large caps and using FBM KLCI as the benchmark, he thinks that the upside appears to be limited because the valuation is already 1 standard deviation above the mean. As for mid to small caps using FBM 70 or FBM Small Cap as the benchmark, the valuation is close to the mean, which suggests that they are not as expensive as the large caps. 

UOB Asset Management is a bottom-up house where they drill down into individual companies to look for the best investment opportunities in various companies, irrespective of the health of the economic growth. They will continue to look for investment opportunities. 

3. Now that GST is implemented, is there any negative impact thus far that could pose downside risks to the economic growth? 
He is expecting consumption growth to moderate, probably about 5% this year as compared to slightly over 7% last year. However, the impact may not be that significant as some may think for two reasons; one, he thinks that the impact from GST would be short-term as compared to the experiences in other countries where consumption got back to normalcy in one to two quarters and second, some of the adjustments for GST have already taken place much earlier, in fact as early as the third quarter of 2014 where consumers were getting more cautious. Thus, the impact in 2015 may not be that significant. 

4. The depreciation of the Ringgit has weighed on market sentiment. If it continues to weaken, what do you expect to happen? Is it all doom and gloom? 
Firstly, it is a function of the US dollar strengthening against almost all major currencies. Secondly, the Ringgit has depreciated a bit more because of the linkage with oil. Malaysia is a net oil and gas exporter, so weaker oil prices affect Malaysia’s finances and it gets reflected in a weaker Ringgit. However, if we compare Malaysia to other countries which has a commodity flavour such as Australia and Norway, since end of October 2014 when oil prices started to fall, the Ringgit has actually strengthened 2% to 5% versus the Australian dollar and the Norwegian krone, but we aren’t saying that Australia and Norway are experiencing doom and gloom. So, he thinks that we have to put things into context. 

5. Based on your views and outlook, how are you positioning your portfolio? What are some of the sectors that you have the most and least conviction in? 
He is a bit more cautious on the domestic market in the short term because of volatility in the oil price. If oil prices remain volatile in the short term, the Malaysia’s equity market may experience volatility too. As such, he is keeping some cash in his portfolio to take advantage of any market volatility that may happen. 

For second half of 2015 onwards, he thinks that market conditions will improve on the back of a more sustained recovery in oil prices. He thinks that the oil supply will start to respond and that will help to underpin a more sustained recovery in oil which will translate to a more sustained recovery in the Malaysia’s equity market. Thus, he is a bit more cautious in the short term but more positive in the next 6 to 12 months. 

In terms of sectors, he likes the exporters and construction sectors. He dislikes the plantations sector and financials sectors.