KUALA LUMPUR, Dec 28: The Malaysian market is expected to remain tough next year as corporate earnings remain weak, said Eastspring Investments Bhd general manager of investment services Yvonne Tan.
“Corporate earnings forecast in the beginning of the year were about high single-digit growth. As of now, market is actually looking at a negative growth of 3%. Early last year, people were expecting high single-digit earnings growth but, towards the end, the earnings were revised to negative 5%. So this is the second year again we drop to an EPS (earnings per share) decline for the whole market. That doesn’t really help. Earnings are quite weak at corporate level,” she toldSunBiz in an interview.
Although the market is still quite optimistic with consensus looking at 7.9% earnings growth next year, Tan expects 2016 to be a tough and challenging year due to very weak consumer sentiment and a very challenging business environment, with earnings growth projected at 5% next year.
Eastpring, as an asset management and investment house, is a stock picker and while the market has dropped this year, some of its funds recorded positive returns. Tan said it will maintain the same strategy for 2016, with a focus on companies that deliver good earnings and returns.
“We adopt the same strategy going forward. Even though consumer sentiment is low, business is very challenging, we do think that there are some companies that can still continue to do quite well in this type of situation. We are researching some of these companies,” she said.
Tan said some sectors may continue to do well next year namely construction, property, technology and manufacturing. It is neutral on plantation.
“In the construction sector, there are quite a number of projects being tendered out next year and with that kind of project size, the bigger and smaller companies will also enjoy,” she said.
In addition, if Chinese construction companies come in on some of the mega projects such as double-tracking or high-speed rail, these companies may partner some local companies or tender some of the jobs to local construction companies.
“We are also looking at some property companies because right now they are very distressed. I would say valuations are very attractive right now because it (the sector) is out of favour. People don’t like property. I think property at a certain segment, for example the high-end segment, they are seeing very weak demand but in the mass market, affordable housing, I think the demand is still there and they should be doing well.
“So, selected companies may continue to do well, thus the valuation angle is actually very attractive and we want to position for maybe the next cycle but the cycle won’t come back so soon. The whole property market is still quite soft right now but, from valuation angle, we think we can pick some good stocks with some good dividend yield,” she said.
Commenting on talk of the Developer Interest Bearing Scheme (DIBS) returning, Tan said it is unlikely that the central bank would allow this, as household debt is high and bringing back the scheme would attract another round of speculation.
“However if DIBS is revived, that itself will be a re-rating factor for the whole property sector. We may want to look more aggressively at this sector if that happens. But our house view is we don’t think it will happen because it just doesn’t help, already people are complaining about house prices being high,” she added.
On currency matters, Tan expects the ringgit to remain relatively weak or to hover around the current level next year but a sharp correction like what happened this year is unlikely to be repeated.
“For oil, it is very much a supply and demand thing. Our view is that the oil price looks like it will remain weak because the demand is not picking up strongly but the supply is coming in strongly. The supply side from Iran and Iraq is the one adding more to the supply and from Opec we know they are not going to reduce the production. They may want to even increase production to make up for the revenue.
“So, on that front, it is quite difficult to see any reason for a strong oil price unless some geopolitical issue happens again in the Middle East. If not, based on supply and demand, it is not supportive of a strong oil price. It doesn’t look like it is going to rebound very strongly,” she said.
Tan said catalysts for 2016 are less negative compared with 2015 but the market will remain challenging.
“There are still some downside risks because the banks are facing challenges. Credit cost is rising and you have quite a high loan to deposit ratio, NPL may start to rise again. It is a very challenging year for banks and banks make up 30% of the whole market. That sector may find it a bit challenging next year,” she added.
— THE SUN