The stars are aligned
Although not a blowout quarter in terms of outperformance, the fact that earnings growth was more or less sustained at the frenzied first quarter (1Q) pace, is a good enough story to write of corporate Malaysia’s second quarter (2Q) reporting season.
Earnings disappointments and surprises too were more or less unchanged in the 2Q period with some 17.9% of companies reporting better than expected results while 22.7% were disappointing, which translated to a ratio of 1.27 times. This was just marginally weaker than the preceding quarter when 18% of companies surprised the market and an equal 22.7% disappointed, translating to a ratio of 1.26 times.
FBM KLCI at 1,732
Post 2Q earnings, brokers adjusted earnings marginally with net earnings now expected to increase by 14.8% for this year and 9.5% in 2025.
This is an upward adjustment of approximately 0.2 and 1.3 percentage points, respectively.
This was good enough reason for most broking firms to upgrade their (FBM KLCI) fair value forecast to 1,732 points from 1,704 points three months ago.
Since the end of the 4Q23 reporting period in February this year, the FBM KLCI fair value has been raised by 114 points or 7%.
The increase in the FBM KLCI fair value for this quarter was less profound with three broking firms keeping their target intact while five others raised their forecast by between 25 points and 120 points. There was also an expansion in the price-earnings ratio (PER) multiple to derive the fair value of the FBM KLCI with the current fair value based on a forward PER of 15.7 times from 15.4 times three months ago and just 14.6 times in early March 2024.
Stellar performance
Similar to the 1Q reporting period, the 2Q reporting season was again led by the banking sector, which saw strong performance from Hong Leong Financial Group Bhd, Hong Leong Bank, and Malayan Banking Bhd, as well as decent growth from both Public Bank Bhd and AMMB Holdings Bhd.
Within the construction and building materials, IJM Corp Bhd reported a disappointing set of results while cement companies sealed the quarter with a stellar performance from both Malayan Cement Bhd and Cahya Mata Sarawak Bhd.
Consumers were a mixed bag with Nestle (M) Bhd reporting a weaker performance while Farm Fresh Bhd, Leong Hup Holdings, and QL Resources Bhd saw a stronger quarter.
The plantation sector was decent with strong performance coming from Sarawak Oil Palms Bhd while United Plantations Bhd saw earnings jumped by nearly 40% quarter-on-quarter (q-o-q).
Within the property sector, Sime Darby Property Bhd reported strong performance but S P Setia Bhd was hit by impairments for its rental guarantee scheme for its Battersea project.
Among the rubber glove makers, results were strong coming from both Kossan Rubber Industries Bhd and Hartalega Holdings Bhd but Supermax Corp Bhd and Top Glove Corp Bhd have yet to see a substantial turnaround just yet.
The technology sector was one of the most hit sectors this quarter as most of them missed expectations, although tech-giant, Malaysian Pacific Industries Bhd reported a stronger underlying performance.
Telcos were largely in-line with expectations while the utility sector saw both Tenaga Nasional Bhd and YTL Power International Bhd reporting a strong quarter and beating market expectations.
Quicker earnings growth
After expanding by just 4.2% year-on-year (y-o-y) in 1Q24, the Malaysian economy regained further momentum in the 2Q period as the economy expanded by 5.9% y-o-y, marginally ahead of the advanced estimate growth of 5.8%. On a seasonal-adjusted basis, Malaysia recorded a 2.9% q-o-q expansion against the preceding quarter’s growth of 1.5%.
In nominal terms, the Malaysian economy expanded by 1.6% q-o-q and 7.5% y-o-y to RM472.4bil in the 2Q24 period.
As for earnings growth, corporate Malaysia’s earnings momentum was much quicker than nominal gross domestic product (GDP) growth, as earnings expanded by 5% q-o-q and 19.4% y-o-y, while for the 1H period, net earnings jumped 19.7% y-o-y, well ahead of the nominal GDP growth of 6.2% for the same period.
All roads lead to Bursa
Having outperformed the regional markets with a year-to-date gain of more than 14.5%, investors have been flocking to the market as Malaysia has many things going for it simultaneously. The positive spillover of higher foreign direct investments, a stable inflation and interest rate environment, and early hits from the Madani Economy Framework and the ringgit play have added to the market’s momentum.
Rotational interest from the property sector, to small-cap stocks as well as to construction and a rally among banking stocks have taken the local bourse to near a four-year high.
But the biggest move must be from the appreciating local currency. The US dollar-ringgit exchange rate, which stood at 4.2250 at the time of writing, is up 8% against the greenback year-to-date.
The US dollar, measured by the Dollar Index, is down by 0.8% for the same period. In essence, the ringgit has appreciated not due to the US dollar’s weakness but due to the ringgit’s strength. From the weakest point this year, when the US dollar-ringgit was trading at 4.7925, the ringgit is up by 11.8%. The Dollar Index on the other hand, which traded at 103.96 then, has dropped 3.2%, which suggests that on its own, the ringgit has appreciated by 8.5%.
Foreign flows
Some may call it hot money, as foreign investors tend to position in the market not just for capital gains but also for currency appreciation.
Year-to-date, the Malaysian capital market has seen some RM20.7bil in inflows up to August 2024.
Of this, some RM17.7bil entered the fixed income market and the balance of RM3.05bil flowed into the equity market.
A further RM1.23bil net foreign portfolio inflows were drawn to the equity market up to Aug 19, 2024. Interestingly, the inflows in the past two months have been the strongest with the fixed income market seeing a total of RM16.8bil, while the equity market, excluding the August inflows, saw some RM3.9bil inflows.
Budget 2025 and rates
With the surprise 50 basis points (bps) rate cut by the US Federal Reserve and expectations of another 25 bps and 50 bps cut in the November and December 2024 meetings, respectively, all eyes are on other central banks as to whether they will follow suit or otherwise.
Of course, for most central banks, the paramount barometer is the domestic inflation pressure but with lower commodity prices, especially lower crude oil prices, inflation pressure is expected to normalise in the near term.
As it is, we saw Indonesia cutting benchmark interest rates for the first time in more than three years, while the European Central Bank, Bank of England, Reserve Bank of New Zealand, and Bank of Canada too had recently lowered rates.
For Malaysia, Bank Negara maintained the overnight policy rate at 3% in its recent meeting and is unlikely to move the needle just yet mainly on the back of firm economic growth as well as relatively higher inflation prints.
Furthermore, with the subsidy rationalisation plan for petrol likely to be made known soon, there is some potential tailwind that could sustain inflation prints at a higher level for some time.
For the market, all eyes will likely be on Budget 2025 as the government is seen tabling a pro-people and business budget but with some necessary fiscal measures that will ensure Malaysia remains committed to fiscal consolidation. Further details of what to expect or a wish list for Budget 2025 will be discussed next week.
For now, the stars are definitely aligned for Malaysia.