Jun 24, 2013

Malaysia Equity Foreign Holding - Bracing For Volatility

Higher volatility ahead. Global markets went into a tailspin after US Federal Reserve Chairman Ben Bernanke said on Wednesday (19 June) that the Fed will start cutting back its bond purchase programme later this year if the economy continues to improve. The Fed may also stop the programme if US unemployment falls to 7% by mid-2014. Datapoints out of the US over the next few months will be closely scrutinised. We expect greater volatility in global markets in the months ahead, and Malaysian equities will not be spared. Stocks with higher foreign shareholding in recent months may be more vulnerable.

External ripples. Malaysian equities were not spared from the global selldown last week, with the KLCI retracing 17 points (-1%) in the last two trading days. The KLCI had gained 84 points (+5%) for the year to 19 June and is up 78 points (+4.6%) since the 13th general election (13GE) on 5 May, to 19 June. At last Friday’s close, the KLCI’s valuations were marginally higher at 15.6x/14.8x 2013/2014 PER and 15.2x 12M forward earnings, compared to 2013/2014 PERs of 15.0x/ 14.2x at the start of the year. Equities’ trading value last Friday a high MYR3.85b versus the YTD average of MYR2.05b (2012: MYR1.67b).

Foreign buying in the earlier months. Foreign holdings of Malaysian equities have risen 1.3ppts in 5M13 to 25.2% at end-May 2013 (end-2012: 23.9%, end-2011: 22.7%). This was closing in on the highs of 26-27% at end-2007/early-2008 (the lows were 18.1% at end-2002/end-2003 and 20.3% in Nov 2009). Foreign funds were net buyers to the tune of MYR18b in the first 5M of this year, exceeding the total net foreign buying of MYR13.7b for the whole of 2012. While this is an indication of investor confidence in Malaysian equities, the KLCI’s underperformance before the 13GE also attracted some hot money.

Stocks with higher foreign holdings. Stocks which have seen quite considerable additions to their foreign holdings in the recent months will be more vulnerable in a volatile market, we believe. Within our research universe, stocks with higher foreign holdings since end-2012 are SapuraKencana (+13ppts), Gamuda (+11ppts), SP Setia (+10.8ppts), MAHB (+6.7ppts), IJM Corp (+6.5ppts), Maybank (+6.3ppts), WCT (+6ppts), UEM Land (+4.4ppts), Tenaga (+3.7ppts), Mah Sing (+3.1ppts), CIMB (+2.3ppts), BAT (+1.6ppts), Sunway (+1.4ppts), RHB Cap (+1.2ppts) and Genting Malaysia (+1ppts).

Market strategy. We maintain our sector weights and stock calls. Supported by stable macroeconomic fundamentals and policies, a strong banking system, healthy corporate balance sheets and continuous earnings growth, the fundamentals of Malaysian equities are intact, and they do offer defensiveness amid volatility on the external front. In terms of valuation, at 15.2x 12M forward earnings, the KLCI is not pricey, and is close to its long-term mean PER of 14.8x. The market’s longer-term growth trajectory is intact; any weakness ahead is an opportunity to accumulate quality stocks, in our view.

by MIB