A result season to forget
SINCE the last reporting season and over the past three months, the FBM KLCI has turned more volatile due to external factors.
This was after US President Donald Trump imposed a reciprocal tariff rate of 24% on Malaysia as well as on the rest of world with a rate from as low as 10% to as high as 49%.
However, post-Liberation Day, and after the reciprocal tariff rate was reduced to 10% for 90 days, the market has since regained its momentum.
The FBM KLCI gained 13.1% from the April 9 low of 1,400 point to hit a high of 1,583 on May 14.
As first quarter of 2025 (1Q25) earnings began to trickle in, earnings disappointment took centre stage, and the FBM KLCI gave up as much as 4.7% to close at the end of May at 1,508 points.
Even foreign selling accelerated towards the second half of May as RM1.53bil left the market on earnings misses over the last 10 trading days and on the first trading day after the quarterly reporting season ended last Friday.
Missing the mark
Core 1Q25 earnings momentum slowed further as year-on-year (y-o-y) earnings contracted by 1.6% against the 6.9% y-o-y growth in the preceding quarter.
However, on a quarter-to-quarter (q-o-q) basis, the negative earnings momentum over the past two preceding quarters saw a reversal as earnings expanded by 3% q-o-q.
Not surprisingly, earnings misses were aplenty as companies reporting earnings surprises fell to just 10% in 1Q25 against 21.7% and 18.2% that were reported in 4Q24 and 3Q24 respectively.
The market was overwhelmed by a disappointing set of results with 36.3% of companies falling short of expectations, an increase from 28% and 30.7% that was reported in the preceding two quarters.
The increase in the number of companies missing estimates and the reduced number of companies that came in ahead of forecasts suggest a worsening disappointing ratio, which rose to 3.62 times from a mere 1.29 times in 4Q24 and 1.68 times in the 3Q24 earnings season.
Fair value slashed
Post-4Q24 earnings in February, the consensus was looking at 1,747 points as the fair value of the FBM KLCI for 2025.
Of course, post-Liberation Day, as the Malaysian economic forecast was gradually cut, most brokers lowered the FBM KLCI estimate to 1,655 points based on a price-to-earnings (PE) multiple of 15.5 times.
The disappointing set of 1Q 2025 results saw them lowering their FBM KLCI target further with consensus now looking at 1,622 points as the new FBM KLCI fair value for this year based on a lower PE multiple of 14.9 times.
Notably, earnings growth has been trimmed substantially for this year to just 2.8% from 7.1%, which is a 4.3 percentage points reduction, while earnings momentum for 2026 remains steady at 7%.
Big misses
Among the FBM KLCI 30-stock constituents, Petronas Chemicals Group Bhd had a torrid quarter as it reported a loss of RM18mil against RM668mil posted in 1Q24 and RM519mil in the preceding quarter.
The poor performance was attributable to higher overheads as well as disruptions in business operations.
Sime Darby Bhd was another big miss due to weakness from all divisions, including from its UMW Holdings Bhd acquisition that was completed in March last year as net earnings for 1Q25 fell by 45% y-o-y and 36% q-o-q to RM193mil.
Banking stocks disappointed this time around, due to slower loans growth as well as tighter net interest margins.
The gaming sector, especially Genting Bhd and Genting Malaysia Bhd, remained weak but the number forecast operators showed promisie with earnings ahead of forecasts.
Except for Supermax Corp Bhd, the other top three glovemakers remained profitable while the construction sector saw IJM Corp Bhd and Sunway Construction Group returning stellar profits.
The consumer sector was disappointing, although strength in earnings momentum was visible in companies like MR DIY Group (M) Bhd.
Nestle (M) Bhd saw a decent recovery in earnings after a run of poor results, altough it was still 17% lower y-o-y.
Newbies Oriental Kopi Holdings Bhd and 99 Speed Mart Retail Holdings Bhd also performed well.
Oriental Kopi’s earnings almost doubled y-o-y, although earnings growth on a q-o-q basis was modest at just over 5%.
For 99 Speed Mart, earnings growth was significantly strong as the bottomline expanded by more than 15% q-o-q.
It was also a weak quarter for automakers, while the healthcare sector was a disappointment as both IHH Healthcare Bhd and KPJ Healthcare Bhd saw reduced profits despite higher toplines.
Property and plantation stocks performed poorly as most were either within expectations or below consensus estimates.
Beyond tariffs
The markets remain uncertain about US reciprocal tariffs after the 90-day pause ends next month.
Most expect the United States to maintain a 10% tariff rate, which is widely accepted.
However, concerns arise from Trump’s unpredictable stance on tariffs, particularly with China.
This could extend the uncertainty on tariffs, affecting global growth, trade, and inflation.
It may also lead to more market instability as investors become cautious.
Politics and policies
With the resignation of two ministers from Datuk Seri Anwar Ibrahim’s Cabinet and the move by Tengku Datuk Seri Zafrul Abdul Aziz to quit Umno, there is added noise on the political front as to who will fill the vacant positions.
Tengku Zafrul’s second term as senator ends in early December and he would have stepped down as Investment, Trade and Industry minister by then.
The question on investors’ minds is whether his application to join Parti Keadilan Rakyat will lead to a by-election to enable him to be elected as a member of Parliament.
The Sabah elections, which must be held within the next six months, is another spanner for political stability.
As for policies, the market will also be looking at the tabling of the 13th Malaysia Plan (13MP).
Set to be tabled on July 31, the five-year plan will be one of the building blocks of the 10-year Madani Economy Framework that was tabled in 2023.
Post-13MP, all eyes will also be on the fuel subsidy rationalisation plan as well as Budget 2026, which will be tabled by Anwar on Oct 10.
Next year’s budget will likely focus on sustaining the government’s fiscal reform efforts but sustaining growth.
Second wave
The local bourse recorded a net foreign inflow of RM1.03bil in May, but a second wave of net selling from May 17 to June 5 resulted in an RM1.7bil outflow.
Year-to-date, net foreign selling has reached RM11.11bil, surpassing last year’s RM9.97bil.
With a disappointing 1Q25 earnings season and lower forecasts, foreign selling pressure may persist.
However, reduced earnings forecasts could lead to better results in the coming quarters.