THE market is running out of ideas, some say.
“It’s getting harder to get good investment ideas in the local scene and almost everyone is buying into the same ideas,” quips a fund manager.
Some analysts are expecting a bleak 2016 as they expect the low crude oil price level to continue and much of the country’s fundamentals could remain “more or less the same”.
While the economy is expected to grow at 4.5% this year, there could be more risks as inflation is expected to climb much higher year-on-year at between 3.2% and 3.7%. That’s due to the weak currency and subsidy cuts from the Government, which will lead to a rise in the cost of living and lower consumption.
And all these potential negatives could hurt the margins and earnings of companies.
But it isn’t necessarily all gloom and doom. There could be pockets of opportunities, say some experienced investors, who are always on the lookout for undervalued gems.
On top of that, there are a few investment themes that are noteworthy.
One theory has it that because 2015 had been a bad year, things might have bottomed out or that a lot of events have been priced in.
Last year, the ringgit had lost close to a quarter of its value, crude palm oil prices saw little change at RM2,292 per tonne, Brent plunged a further 35% to US$37 per barrel and the FBM KLCI shed 4% to 1,692.51 points.
Looking forward, local research houses have year-end targets for the FBM KLCI that range from 1,740 to 1,800 points while CIMB Research has a higher year-end target of 1,900 points.
As for crude oil, the Government had planned for the budget on the assumption that Brent crude will average at US$48 per barrel in 2016. But Brent crude prices have fallen below US$40 per barrel since Dec 9, 2015 and fears are that it will remain at those levels or lower.
At such levels, while most shale producers are struggling it does not seem to have lessened their supply.
There are other signs: Organisation of Petroleum Exporting Countries (Opec) is holding on to its strategy of pumping the same amount of oil to maintain market share, Iran will be ramping up production once sanctions against it are lifted and the US has lifted a 40-year ban on crude oil export.
On the other hand, demand for crude oil is not picking up as quickly due to the anticipated sluggish world economic growth.
While analysts expect higher trading prices for crude palm oil (CPO), most of them are still neutral as concern on high supply lingers.
Maybank Investment Bank Research opines that there will be trading opportunities in the first half due to the El Nino effect.
“We expect CPO price to hit RM2,700 per tonne and peak between March and May, which corresponds with the low crop season,” says Maybank IB Research, adding that its 2016 CPO average selling price forecast is unchanged at RM2,300 per tonne.
CIMB Research, on the other hand, projects CPO prices to rise a mere 12% to RM2,450 per tonne. It points to a number of factors. Labour costs, which are expected to increase by 5%-10% due to minimum wage regulations in Malaysia and Indonesia, higher fertiliser prices, the ringgit’s weakness against the US dollar and higher transportation costs to partly offset the better CPO selling prices.
Notably, the higher minimum wage will also hurt other labour-intensive industries. And higher utility bills as a result of subsidy cuts are likely to add to the operating expenditure of manufacturers. If they cannot pass these costs to their customers, their profit margins could be impacted.
Inflation is expected grow between 3% and 3.7%, according to several economists.
As for the local currency, MIDF Research anticipates a rebound to 3.90 against the greenback by year-end despite low commodity prices.
Maybank IB Research expects the US dollar to ringgit exchange rate to move within the 3.95 to 4.15 range and average at 4.11 while CIMB Research believes the ringgit will remain weak against the US dollar and hit 4.60 by end-2016.
Externally, China’s sub-7% economic growth will be the new norm as predicted by analysts. They also foresee yuan to weaken further against the greenback and that could drag down the performance of other emerging market currencies including the ringgit.
Afterall, Malaysia is China’s biggest trading partner among Asean countries.
Maybank IB Research advises investors to strengthen their holdings of stocks that will benefit from China’s One Belt, One Road for the longer-term. The same goes to the beneficiaries of the Trans-Pacific Partnership Agreement.
Bright spots
In the near-term, investors are advised to strategise based on the award of contracts for the country’s development plans, weakness in ringgit, Sarawak’s state election, a strong El Nino and Shariah based investing, Maybank IB Research says.
AllianceDBS Research says export-oriented sectors such as technology and shipping are rated “overweight” in anticipation of the weakness in ringgit.
“While the glove sector also benefits from a weaker ringgit, stocks within the sector have done very well and valuation is no longer cheap,” it adds.
Several banking stocks are looking more attractive now due to the dividend yields that they to offer as well as more compelling price to book values.
Quoting an example of Malayan Banking Bhd, the 7% dividend yield and potential 3% rebound in the ringgit would provide an upside of 10% for a foreign investor, says a research head.
CIMB Research has upgraded the banking sector to “overweight” from “underweight”.
Another bright spot in is the construction sector as the Government commits to a slew of mega infrastructure projects such as the MRT and LRT.
“Going into 2016, the Government has committed RM50bil (+5.4% year-on-year) of development expenditure.
“As 2016 is just the first year under the 11th Malaysia Plan where the Government has proposed to spend RM260bil, this would be ramped up progressively over the planning period of 11MP which spans over five years,” AllianceDBS Research says.
In Sabah and Sarawak, the development of the RM27bil Pan Borneo Highway will also benefit construction firms especially local players there.
According to AmResearch, Sarawak’s budget was increased by 26.5% to RM8.04bil from a year ago.
And with the Sarawak elections coming, investors should also look for potential beneficiaries.
http://www.thestar.com.my/business/business-news/2016/01/02/stocks-to-watch-in-2016/?style=biz
