FOCUS OF THE DAY
Market Strategy : Malaysia: The Hare And The Tortoise
Conventional wisdom says that the stock market is always forward looking, being 6-12 months ahead of the market earnings – just like how the furry one racing ahead of the hard-shelled one in the children’s classic tale of The Hare And The Tortoise. YTD, the Hare, i.e. FBM KLCI index, has risen by 8.1% to 1,775 pts from 1,642 pts, backed largely by inflows of funds back to the emerging markets. On the other hand, we project the Tortoise, i.e. FBM KLCI earnings, to grow by only 6.6% in 2017. The Hare is way ahead of the Tortoise. The Hare has clocked up a "distance" of 8.1% in just four-and-a-half months, as compared with a "distance" of 6.6% that will take the Tortoise 12 months to complete. As the story goes, the Hare decides to take a little nap under a shady tree.
We feel that the extent of the market’s lead over earnings, at this point of time, is going to rattle the market’s comfort level a little. FBM KLCI currently already trades at 17.8x our 2017F FBM KLCI earnings, which has surpassed our target of 17.5x. The Hare has certainly got a little further ahead of the Tortoise than it ought to be. Also, we believe the market should take a breather, rightfully, ahead of a key event, i.e. the MSCI index rebalancing by the end of the month. If history is a guide, the event is likely to turn out to be a negative one for the market. We remain positive on the equity market outlook in Malaysia, although we do expect volatility over the immediate term as the market has moved a little further ahead of earnings than it ought to be, coupled with the potential negative impact coming from the MSCI Emerging Markets Index rebalancing at the end of the month.
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