Suppressed earnings and political uncertainties: Perfect storm awaits FM KLCI?
AMID the backdrop of macro challenges relating to surging inflation, sharply rising interest rates and growing recession risks that have weighed on developed markets are now catching up with this region, Maybank IB Research has reduced its end-2022 FBM KLCI target by 12.3% to 1,500 (from 1,710 previously).
The research house based its outlook on a mixed 1Q 2022 reporting, rising operating margin pressures across a broad range of sectors underpinned by increasing labour and raw material input costs and a combination of rising inflation and interest rates that are eroding disposable incomes and demand moving into 2H 2022.
“The tight fiscal situation means concerns around the sustainability of current inflation-capping subsidies are a major market overhang, the latter made worse by policy inertia/U-turns by a fractious governing coalition that has yet to signal readiness for general elections (GE15) to be held by mid-2023,” opined Maybank Kim Eng’s regional equity research head Anand Pathmakanthan and Maybank IB Research’s head Wong Chew Hann.
While resilient external demand and strong bank sector fundamentals are key market supports, Maybank IB Research expects the market to nonetheless struggle to find traction in the face of broadening growth and earnings stresses/negative revisions stemming from an inter-related combination of margin squeeze (higher input costs) and weakening end-demand (eroding real disposable incomes).
“Policy flip-flops relating to subsidies have also raised market risk premium as the implied urgent fiscal situation will raise concerns about further earnings sapping levies on the corporate sector akin to Cukai Makmur (windfall tax) in Budget 2022,” suggests the research house.
“Further, hopes of an early GE15 that would allow a reset of delivering optimal and expedited policy responses based on long-term economic realities now appears unlikely.”
Very broadly, the research house expects inflation and interest rates to dominate market direction with favoured havens being financials, commodities and consumer staples while down trading on renewables and exporters.
While reform of government-linked companies (GLC) could provide a major economic impetus, this appears less likely than ever with dividend yield and supply chain relocation potentially offering much greater investability as does sustainability/ESG (environmental, social and governance) investing. – FocusM July 5, 2022
