KUALA LUMPUR – UOB Kay Hian Malaysia Research expects the local stock market to be buoyed by expectations of a general election in 2017 after the disappointing corporate results for the quarter ended Sept 30, 2016.

In its recent strategy report, it said overall, it largely maintained its 2016-17 earnings forecasts for companies under its coverage.

“We expect FBM KLCI’s earnings to recover by 8% in 2017, a moderate turnaround after four years’ of near-zero or sub-zero growth.

“We maintain our end-16 FBMKLCI target at 1,700, with an indicative 1,730 target for end-2017 (bottom-up target of 1,740). Our end-16 target implies a high target 2017F PE of 16.6 times (+1.3 standard deviation to the historical mean of 14.7 times),” it said.

UOB Kay Hian Research said its assessment imputes in year-end window dressing and positive catalysts.

The catalysts are a) improved crude oil price outlook post-OPEC’s production quota cut, which lifts the ringgit outlook; b) market to start pricing in a potential general election in 1H17; and c) modest resumption of corporate earnings growth.

“While the ringgit disappointingly did not appreciate against the US dollar on Thursday, investors will eventually look past concerns tied to Bank Negara’s recent curb against non-deliverable forwards (offshore trading), as the firm crude oil prices sustain.

“Investment themes in 2017 include: a) infra and building material plays, b) electrical and electronics (E&E) Trend Riders, and c) quality dividend plays.

“The first theme, which partly depends on China FDI, remains undiluted by China’s recent capital control. We expect China to continue supporting its government-supported strategic investments in Malaysia, which include various mega infrastructure and the Bandar Malaysia projects.

“Our top picks are Gamuda, Tenaga and Genting Bhd (replacing Genting Malaysia which has recently appreciated) or large-caps, and Bumi Armada, Ekovest, Kerjaya Prospek, Kim Loong, MRCB-Quill REIT and VS Industry for small-mid caps. Our top Sells  continue to be Hartalega, UMW and Telekom Malaysia,” it said.

As for the quarterly results ended Sept 30, 206, UOB Kay Hian Research said while the good news is that its corporate earnings growth forecasts remain effectively unchanged post 3Q16, the breadth of disappointments remain wide.

The small-medium capitalised companies’ results underwhelmed expectations. Earnings disappointments were a key factor in the recent sell-down of particularly small- and mid-cap concept stocks, adding woes to the post-Trump period.

“Nevertheless, we expect domestic equity markets to be buoyed by expectations of a general election in 2017,” it said.
The research house also said this was the first quarter of no downgrade for FBM KLCI earnings since 1Q14.

“Coming in as a pleasant break from all of the post-Trump negative economic developments (eg the ringgit’s plunge), were the largely in-line earnings in 3Q16 which is the first in-line quarter since 1Q14,” it said.

A total of 14 (14%) companies in our universe surpassed expectations while 25 (26%) companies underperformed our estimates, leaving the remaining 59 (60%) companies at par with our expectations. Providing some relief, the gaming sector and Tenaga were prominent earnings beaters.

As for the small-mid cap stocks were underwhelming. This results season was particularly bad for small-mid caps, with 32% of companies under UOB Kay Hian Research’s small-mid cap coverage missing expectations, versus only 18% which beat expectations.

“Investors’ intolerance for unpleasant earnings surprises were obvious, for example the 37.6% plunge in Felda Global Venture’s stock price in November (it guided for substantial losses). The FBM Small Cap Index fell 6.6% in November, underperforming the FBM KLCI by 5.6% year-to-date,” it said.