THE first quarter of 2014 (1Q14), after a choppy start, ended on a fairly uneventful note for equity investors.
The headline FBM KLCI closed at 1,849.2 or up 0.7% for the month of March, further paring losses for the year-to-date to just about 1% following the recovery of some lost ground in February.
Trading volume improved in 1Q14, with the number of shares traded daily rising to about 2.07 billion, on average, compared with 1.71 billion in 4Q13 — boosted by periods of increased participation from retail investors (see Chart 1).
Looking back, the past three months witnessed sentiment swings on the local bourse that were driven, primarily, by external events.
Confidence in emerging markets — and their currencies — were rocked by fund outflows at the start of the year on the back of expectations of rising interest rates in the US. Selling pressure eased going into February and March — and bellwether indices in regional markets regained some poise but many still ended the quarter in the red (see Table 1).
Mirroring this sentiment, the domestic equity market saw intensified foreign selling in January, with net outflow totalling some RM3.7 billion. This was reduced to around RM1.7 billion in February and further to about RM0.7 billion last month (see Chart 2).
The persistent foreign selling brought total outflow to more than RM6 billion in 1Q14. Purchases by local institutional funds kept losses at bay, with the benchmark index losing just 1%.
If, however, stocks on Bursa Malaysia are to perform for the rest of this year, it is imperative that corporate earnings regain positive momentum.
Earnings must regain positive momentum
As such, the upcoming earnings results season for 1Q14, to be released over April-May, will be closely scrutinised for any sign of reversal — after having disappointed for consecutive quarters over the past two to three years.
The last results season for 4Q13 was, once again, a letdown even though expectations have been gradually pared through the year. As it turned out, while over half of the companies covered by research analysts met expectations, more of the remaining companies disappointed as compared to those that beat consensus.
Corporate earnings growth has been performing well below par — estimated at just 2%-3% last year, similar to levels recorded in 2012. By contrast, the KLCI gained 10.3% and 10.5% in 2012 and 2013 respectively. The outsized gains as compared against earnings growth, on average, mean that share prices are being supported by higher and higher valuations.
The forward price-earnings ratio for the broader market is now estimated at more than 17 times — above the longer-term average of about 15 times. High valuations are keeping many investors from putting fresh money into the market.
Therefore, in order for share prices to appreciate further and for gains to be sustainable, earnings growth must catch up.
1Q14 results may set tone for whole year
Many market observers are putting their hopes on the 1Q14 results, that this will be the turnaround quarter. This is underscored by pretty robust earnings growth forecasts for this year, which range from the high single-digit to over 10% currently.
In reality though, the prospects may not be so rosy. For one, domestic consumption, which has been a key driver for our economy in recent years, is slowing — burdened by rising inflation and high household debt. The latter has risen to nearly 87%, from 81% at end-2012. Underlining this, retail sales growth fell well short of expectations, expanding by just 4.5% last year against the forecast of 6%.
The widely expected recovery in exports may also be dampened by the economic slowdown unfolding in China, one of our largest export destinations.
It remains to be seen how company earnings will fare under an environment of weaker demand and rising cost of operations.
Should corporate earnings results remain lacklustre, thus offering few leads, market sentiment would likely continue to be dictated by external events — in particular, the pace of US economic growth, pullback of quantitative easing and start of the rate-hike cycle.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article first appeared in The Edge Financial Daily, on April 2, 2014.
The headline FBM KLCI closed at 1,849.2 or up 0.7% for the month of March, further paring losses for the year-to-date to just about 1% following the recovery of some lost ground in February.
Trading volume improved in 1Q14, with the number of shares traded daily rising to about 2.07 billion, on average, compared with 1.71 billion in 4Q13 — boosted by periods of increased participation from retail investors (see Chart 1).
Looking back, the past three months witnessed sentiment swings on the local bourse that were driven, primarily, by external events.
Confidence in emerging markets — and their currencies — were rocked by fund outflows at the start of the year on the back of expectations of rising interest rates in the US. Selling pressure eased going into February and March — and bellwether indices in regional markets regained some poise but many still ended the quarter in the red (see Table 1).
Mirroring this sentiment, the domestic equity market saw intensified foreign selling in January, with net outflow totalling some RM3.7 billion. This was reduced to around RM1.7 billion in February and further to about RM0.7 billion last month (see Chart 2).
The persistent foreign selling brought total outflow to more than RM6 billion in 1Q14. Purchases by local institutional funds kept losses at bay, with the benchmark index losing just 1%.
If, however, stocks on Bursa Malaysia are to perform for the rest of this year, it is imperative that corporate earnings regain positive momentum.
Earnings must regain positive momentum
As such, the upcoming earnings results season for 1Q14, to be released over April-May, will be closely scrutinised for any sign of reversal — after having disappointed for consecutive quarters over the past two to three years.
The last results season for 4Q13 was, once again, a letdown even though expectations have been gradually pared through the year. As it turned out, while over half of the companies covered by research analysts met expectations, more of the remaining companies disappointed as compared to those that beat consensus.
Corporate earnings growth has been performing well below par — estimated at just 2%-3% last year, similar to levels recorded in 2012. By contrast, the KLCI gained 10.3% and 10.5% in 2012 and 2013 respectively. The outsized gains as compared against earnings growth, on average, mean that share prices are being supported by higher and higher valuations.
The forward price-earnings ratio for the broader market is now estimated at more than 17 times — above the longer-term average of about 15 times. High valuations are keeping many investors from putting fresh money into the market.
Therefore, in order for share prices to appreciate further and for gains to be sustainable, earnings growth must catch up.
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Many market observers are putting their hopes on the 1Q14 results, that this will be the turnaround quarter. This is underscored by pretty robust earnings growth forecasts for this year, which range from the high single-digit to over 10% currently.
In reality though, the prospects may not be so rosy. For one, domestic consumption, which has been a key driver for our economy in recent years, is slowing — burdened by rising inflation and high household debt. The latter has risen to nearly 87%, from 81% at end-2012. Underlining this, retail sales growth fell well short of expectations, expanding by just 4.5% last year against the forecast of 6%.
The widely expected recovery in exports may also be dampened by the economic slowdown unfolding in China, one of our largest export destinations.
It remains to be seen how company earnings will fare under an environment of weaker demand and rising cost of operations.
Should corporate earnings results remain lacklustre, thus offering few leads, market sentiment would likely continue to be dictated by external events — in particular, the pace of US economic growth, pullback of quantitative easing and start of the rate-hike cycle.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article first appeared in The Edge Financial Daily, on April 2, 2014.
