Sunday, 10 December 2017

FBM KLCI’s valuation tells a ‘compelling’ story

KUALA LUMPUR: The FBM KLCI, which is one of the worst-performing markets in Asean despite seeing the most foreign inflow this year in the region, is now trading at a compelling valuation as its forward price-earnings ratio (PER) remains below both its five-year and 10-year averages, according to RHB Asset Management Sdn Bhd chief executive officer (CEO) Ho Seng Yee.

“In terms of valuation, the [FBM] KLCI is very undemanding now. Valuation is relatively compelling as we’re now below the average 10-year price-earnings ratio,” Ho told The Edge Financial Daily in an interview.

Bloomberg data shows that the forward PER for the FBM KLCI is at 15.33 times, while its five-year average and 10-year average PER are at 17 times and 16.5 times respectively.

Notwithstanding the FBM KLCI’s underperformance so far in the region, Ho said the outlook for Bursa Malaysia is very positive, though it hinges on a key aspect: the upcoming corporate earnings report card. But Ho is also upbeat about that.

“Our corporate earnings have been on a downtrend for the past three years, but has now stabilised. We believe corporate earnings have bottomed out and when earnings growth is reflected, the market will move up,” said Ho.

The positivity comes amid a stronger economic environment in Malaysia and globally. Ho noted that the country’s economic prospect has improved tremendously this year — its gross domestic product (GDP) growth gained at a commendable 5.7% in the first half of the year — while strong exports have helped to support the economy, partly thanks to the relatively cheap ringgit.

“The worst is pretty much over,” said Ho, as he recalled the collapse of the oil price in 2014 that resulted in the stock market, which was trading at around 1,900 points at the time, to slump. “The scenario has changed now,” Ho noted, and pointed out that the ringgit has stabilised and could strengthen further with the oil price steadying above the US$60 (RM251) per barrel level.

At the time of writing, the oil price was trading at US$64.08 per barrel, compared with the year-ago level of US$50 per barrel. Though it’s still far from the US$100 per barrel level seen before the collapse, Ho thinks it provides sufficient support to Malaysia’s economy to achieve the Budget 2018 objective, which is based on the assumption of the oil price being at US$52 per barrel.

On FBM KLCI’s underperformance this year compared with its regional peers, Ho said one of the reasons was due to the strong participation of institutional investors in the local bourse.

“One of the key things to note about our market is the presence of institutional players like KWAP (Kumpulan Wang Persaraan [Diperbadankan]), EPF (the Employees Provident Fund) and such. Their participation makes up about 50% of the market. In the past few months, when foreign investors bought in, they sold. That in itself may have kept the [FBM] KLCI from moving to a fantastically high level. Today, the index is only up about 6% to 7% [year to date],” he said.

On the positive side, he said the strong participation of local institutional investors gives good support to the market and helps stabilise it from volatility. Back in the 1990s, Ho said the Malaysian stock market comprised about 70% retail investors, who now only make up about 20% to 25% of the market.

“We’re changing into more of an institutional market, which will make it more stable and defensive,” he added.

Downside risks or buying opportunity?

Regardless of his positivity, with geopolitical risks rising around the world, Ho said caution remains the order of the day. “It probably will not hurt the Malaysian market directly, but it will affect the global market, which in turn will spill over here,” he said.

The global equities market have run and reached record highs recently, noted HSBC Global Asset Management Ltd director and senior equity product specialist Stephen Tong, who was also present in the interview.

“While there’s a concern on whether there will be a crash or not, you just have to remember that corporate earnings are strong and so the market can be supported at this kind of level. Geopolitical risk events, or any event for that matter, could cause investors to take profit and because the volatility is very low, a small event can cause this profit-taking to accelerate, and you will have a small correction. But when these corrections occur, it could be a buying opportunity for those with cash,” Tong said.

While geopolitical risks cannot be ignored, he said its impact on one’s investment can be contained by scenario planning. Besides that, economic indicators and the US Federal Reserve’s (Fed) policy are two other key risks to world shares.

“If there’s some weakness in the economic indicators, then the environment for corporate earnings would be soft. Another key risk is the Fed’s policy, if it raises rates too quickly,” he added.

Regardless, Tong is upbeat about global equities despite its recent runs, which he said was based on strong corporate earnings, which have pushed up subsequent earnings expectations.

“Corporate valuations are based on earnings. Corporate earnings are strong because of synchronised global recovery. Interest rates continue to remain low and the central banks’ normalisation is going to be very gradual, which is supportive of the economy and the market,” he added.

Against this bullish view, RHB is launching its RHB Global Real Estate Equity fund, a fund that feeds into HSBC’s Global Investment Funds — Global Real Estate Equity. Tong said the fund will invest in a portfolio of equities related to the real estate industry in developed markets.

The minimum initial investment is at least RM1,000 for the ringgit class or US$1,000 for the US dollar class. The fund targets the upper-middle class in Malaysia who wants exposure to the property sector in developed markets, said Ho. It is expected to generate an average return of about 6% over a long-term period, based on dividend yield, potential earnings growth and valuation.

“Malaysia is not part of the investment universe in that fund. That means for Malaysian investors who focus on property stocks or own properties in Malaysia, this offers a diversification to exposure outside Malaysia,” Tong said.

He also said that given the low correlation between real estate’s return and other investment assets, it gives a good diversification alternative within one’s investment portfolio.

“Returns on real estate equity has been very similar to global equities, so it’s not giving up much of the return potential compared to investing in equity. It also offers a higher dividend yield relative to global equities, about 4% against 2.6% on average,” he said.

The companies it invests in are typically real estate investment trusts (REITs), and could involve those in operating in retail, residential, office, self-storage, industrial parks, logistics for e-commerce, healthcare facilities and others.

Hope in the retail space

On retail REITs, Tong disagreed with the perception that there are systemic problems plaguing the sector with the advance of e-commerce, saying instead that retail spaces that fail are due to specific problems at specific stores.

“There’s actually a silver lining to some of the stores’ closure seen in the US. If retail space is freed up, you can refurbish and relet the space to better tenants at a higher rate. While some think e-commerce is eating away traditional shops, we see customers like the retail experience such as eating out, going for movies, bowling and many more. It’s much more than just a singular shopping experience,” Tong said.

He highlighted that leading e-commerce player Amazon has bought into Whole Food, which reflects the continued importance of a brick-and-mortar presence.

In Malaysia’s retail space, however, RHB’s Ho agreed that there has been some declines in retail spending in shopping malls, but noted that an improved consumer sentiment, along with better economic environment and higher wages, could see the return of retail spending growth.

Billy Toh
The Edge Financial Daily
November 13, 2017 08:36 am +08

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