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Nikkei Markets

Malaysia corporate earnings to lag initial growth view

Slowing economy, policy uncertainty weigh on sentiment amid mounting trade woes

Kuala Lumpur city skyline
Malaysia’s economic expansion decelerated as exports eased and state-backed investments fell.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia's benchmark corporate earnings growth is expected to slow sharply this year, analysts said, after April-June performance lagged street forecasts in a slowing economy where sentiment remains weak tracking policy uncertainty.

Corporate earnings are likely to edge 4% higher this year, widely trailing the 5.9% initial target following a tepid first-half earnings season, analysts said.

The 30-stock FTSE Bursa Malaysia KLCI will likely end the year at 1800, according to median forecast of nine analysts compiled by Nikkei Markets. The index ended at 1798.57, slightly higher than 1796.81 as at the end of 2017.

Several brokerages scrambled to downgrade their earnings growth forecasts following the recently concluded quarterly reporting season and cautioned of rising risks to share prices ahead.

"The market has started to partially reflect the earnings risks from the on-going review of policies by the government," said CIMB Investment Bank's Head of Research Ivy Ng. "We are of the view that there could be further downside to market earnings."

Overall, more than a third of 129 companies actively covered by CIMB posted underwhelming results for the April-June reporting period, according to a note to clients. Only 7% of the reported results were above expectations.

Through the same period, Malaysia's economic expansion pace decelerated as exports eased and state-backed investments fell. The central bank cut its annual growth forecast to about 5% this year, and economists are worried of further weakness ahead.

Bank Negara Malaysia cautioned of near term risks arising from the heightened trade tension after it held the benchmark interest rate unchanged at 3.25% on Wednesday, citing steady economic growth and stable underlying inflation. The FBM KLCI has recouped some of its losses since the shock victory of Alliance of Hope coalition at the May 9 general election, and is one of the few which have posted year-to-date gains in Asia where the global trade war has largely taken over headlines.

The Nikkei Asia300 Index -- which tracks 300 companies from China, Hong Kong, Taiwan, South Korea, India, and six countries from Southeast Asia - have declined nearly 7% so far this year.

The KLCI appears to be "hovering at fair value based on long term average" price-to-earnings, said Areca Capital Chief Executive Danny Wong. "I expect some short-term choppiness due to the trade war which has yet to be resolved."

Banks earnings grew 8.6% year-on-year in the second quarter, according to Maybank Investment Bank. Petrochemicals, consumer, and healthcare were among the sectors that reported higher year-on-year core profits, while telecom, plantation and properties weakened in the second quarter.

Telecom giant Axiata Group swung to a loss of 3.36 billion ringgit ($817.62 million), while Sime Darby Plantations nearly lost all of its profits in the second quarter partly due to lower palm oil prices. Net profit at ports-to-logistics firm MMC Corporation's plunged 66% year-on-year.

Still, there were some bright spots. Hong Leong Financial Group and CIMB Group Holdings are set for record annual profits. Shares of Petronas Chemicals Group have recently surged to record high thanks to a 42% surge in net profit.

"We remain cautious and continue to advocate a trading approach, given the rising downside risks to growth," said RHB Research Institute Analyst Alexander Chia. "The market would likely remain volatile, presenting trading opportunities, although our core strategy remains defensive."

--Jason Ng

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