KUALA LUMPUR: Affin Hwang Capital Research expects the FBM KLCI to likely register its second consecutive year of EPS decline with a 2019E EPS decline of 1.3%.
“This, along with limited re-rating catalysts, has contributed to capital outflows and the KLCI’s year-to-date performance, ” it said in its strategy report issued on Tuesday.
Nevertheless, it noted that downside should be limited by ample domestic liquidity and a current dividend yield of 3.6%.
“We remain Neutral. As for stock picks, we remove Takaful and Pintaras, and add KL Kepong and Top Glove, to our Top-10 country-pick list, ” it said.
Affin Hwang Research said while there was generally less discontent and more companies reported 3Q19 earnings that were above expectations, the earnings revision trend remained negative, however, dragged by large cap disappointments led by the O&G, telco and aviation sectors.
The research house pointed out earnings disappointment continued into 3Q19 as corporate earnings for the quarter fell 4.9% yoy, its fifth consecutive quarter of decline.
The 3Q19 corporate earnings declined by an absolute RM861m yoy with the drag coming mainly from O&G (-RM714m), telco (-RM235m), gaming (-RM189m) and transport (-RM140m).
This was, however, partially mitigated by utilities (+RM190m), banks (+RM147m), media (+RM112m) and auto (+RM91m).
“On the whole, except for construction, our other sector overweights (EMS, Healthcare, Insurance and MREITS) delivered healthy earnings, ” it said.
Affin Hwang Research said with continued earnings disappointment and a lack of re-rating catalysts, there has been continual capital outflows from the equity market, amounting to RM9.4bn in the year to date (2018: -RM11.7bn).
Correspondingly, foreign equity shareholdings have slipped from its recent high of 24.2% in Mar 2018 to 22.7% as at Oct 2019, largely explaining the KLCI’s sharp ytd underperformance against regional and global markets.
“However, barring any sharp selldown in global equity markets over the near term, we do not envisage a sharp downside for the KLCI, which is supported by ample domestic liquidity and the current dividend yield of 3.6%.
“We make no change to our 2019 KLCI year-end target of 1,650 (based on 18x 2019E market EPS), ” it said.