But now, according to CS in an extensive report yesterday, while the 34% decline in Malaysian equities on a dollar-adjusted basis over the past 45 months was warranted, the market bottom may be close at hand.
Calling it as “the ultimate contrarian trade”, the research house outlined 10 reasons to be bullish (see table).
Among them is that Malaysia’s GDP growth may see further upside, thanks to a rebound in commodities. Additionally, the government may have more leeway to increase spending, given its conservative average crude oil price forecast of US$48 per barrel, CS said.
“We believe that the recent stability in the commodity complex we have witnessed the last of the downgrades to near term growth expectations.
“We now expect a pick-up in growth to 4.5% this year (above consensus expectations of 4.3%), driven by public infrastructure projects, commodity-related investments and a boost to rural income from the recovery in rubber prices,” it explained.
Another reason is on the improvement of earnings dynamics among Malaysian corporates. CS points out that at the sector level, the recovery in earnings revisions is led by the energy and mining space.
Additionally, among the larger sectors, consumer discretionary and staples have recovered sharply well into net positive territory with industrials and financials improving to at least neutral levels.
Another key catalyst for the markets is the attractiveness of the ringgit at present levels after significant devaluation.
Although Malaysia’s 15-year trend of a weaker ringgit in real effective exchange rate (REER) terms is justified by the steady erosion of its share of global exports, the 18% REER devaluation over the past three years appears severely overdone, given the relatively modest decline in export share over this period, CS noted.
One prominent beneficiary from the repair in the macro environment appears to be the banking sector, which is a heavyweight component for the FBM KLCI.
The research house said that private sector credit growth had just bounced off a 13-year low at 5.6% year-on-year in January compared to 4.2% in September last year.
“Encouragingly, deposit growth recovering back into positive territory should serve to moderate the pick-up in the loan-to-deposit ratio, which is currently at elevated levels which typically dampens credit extension,” it said.
In light of its market recommendation, CS has picked its top 10 stocks which offer superior dividends and free cashflow yields.