PETALING JAYA: Sentiment and valuation could be key for the local equity market to head higher after the FBM KLCI closed at a 19-month high on the maiden trading day to usher in the Lunar New Year of the dragon.
The index jumped by 19 points to 1,531 points yesterday with investors buying into financial, construction and plantation counters in particular as all sub indices ended in the green.
The push higher was supported by bullish global markets with the Nikkei 225 ending at 35-year high of 37,964 points after rising 1,065 points yesterday, while the Dow Jones Industrial Average and Nasdaq remain at record highs.
Analysts said Bursa Malaysia fresh high in 2024 is supported by fundamentals and liquidity despite the risk of correction in global markets that could trigger selling pressure locally, especially as the earnings season kicks off into high gear over the next three trading weeks.
“Earnings are one factor in terms of market movement and sentiment. Valuation and to an extent, sentiment is also a factor. It seems that sentiment for the market has started to turn positive.
“We should note that valuations for FBM KLCI is still below its historical range of 16 to 17 times price earnings multiple.
“Hence, we believe it is possible the momentum can continue especially on diminishing headwinds such as the rate hikes in the United States,” said Imran Yusof, director and head at MIDF Research.
He added the fourth quarter 2023 (4Q23) earnings season will give an idea of what to expect of future corporate earnings, in terms of comparison with current expectations and the guidance companies will provide.
If on both accounts earnings came in with positive surprises, it is possible that future earnings expectations will also be assessed positively, he explained.
Early earnings filing by companies like CTOS Digital Bhd , Hartalega Holdings Bhd and Carlsberg Bhd has been good, leading Imran to say the current move higher by the local market could be the case where the price or valuation is starting to reflect the fundamentals of the market.
Investors may already be pricing in rate cuts by the US Federal Reserve this year, which will translate into a weaker US dollar subsequently increasing the appetite for emerging market currencies and assets according to Kevin Khaw, a research analyst at iFAST Capital.
Foreign investors continued to add to their equity holdings of Malaysian companies, being net buyers to the tune of RM400.7mil last week, marking the third consecutive week of net purchases according to a MIDF Research report.
Foreign investors have been net long local stock for three consecutive months, including RM680mil of Malaysian equities last month but net sold Malaysian debt securities worth RM5.1bil in January.
Khaw is not too concerned about the RM4.4bil netflow deficit as economic fundamentals remain attractive.
“Malaysia is an oasis for global MNCs for their supply chain reshoring activities, thanks to the friendly government incentives, well-established infrastructure and human resources. The rally yesterday is just a good start for Bursa in 2024,” he said.Meanwhile, the move by China regulators last week to shore up its equity market with tighter trading restrictions, including banning some quantitative hedge funds from placing sell orders, has helped stem losses there but any impact on Bursa will be via the real economy and over time, said Khaw.
“The support from the Chinese regulator is more focused to cushion the recent slump instead of pushing the stock market to a higher level.
“We think the policy boost will be more focusing on the Chinese onshore market, thus, the spillover effect to markets such as Malaysia will be limited.
“In order to behold Chinese equities creating a positive spillover effect to emerging countries, we need to wait for the Chinese consumer confidence to regain and subsiding geopolitical tension to attract foreign inflows,’ he said.
Technically, the local benchmark made a bullish breakout above its stubborn resistance of 1,520 points after consolidating above the psychological level of 1,500 points over 10 trading days with analysts now predicting the index to have a bullish trading bias.
“The momentum for the market to push higher is supported by positive indicators.
“The relative strength index and the moving average convergence and divergence indicators are support of a sustained move higher to test 1,557 points,” said Aiman Kamil of PhillipCapital.
He expects the benchmark index to get immediate support at the 1,520-point level with the major support level being the psychological level of 1,500 points.