KUALA LUMPUR (Nikkei Markets) -- Malaysia's recent tepid quarterly corporate earnings have heightened investor caution for 2019 despite this year-end's potential rally as long-term uncertainty over the outcome of U.S.-China trade row blur prospects of sharp gains in an economy that is showing signs of fatigue.
"We remain cautious into 2019 on slowing global growth and external headwinds, and as Malaysia corporate earnings growth remains weak," said Maybank Investment Bank's analyst Wong Chew Hann.
The benchmark FBM KLCI, which has shed 6.3% year-to-date, seems set for its biggest decline since 2008. Meanwhile, economic growth decelerated to 4.4% in the third quarter from 4.5% in the second quarter.
The aggregate net profit, after excluding extraordinary items, fell nearly 10% in the quarter ended Sep. 30 for companies under Maybank Investment Bank's coverage. Core earnings will likely decline 1.3% this year compared to previous expectation for a 4.1% growth, Maybank said.
Sectors including the key media, oil and gas, plantation, property, telecommunications, aviation, shipping, port and utilities, are expected to witness earnings contraction, Wong said. She also expects the casino sector's core earnings to shrink due to the casino duty hike effective Jan 2019.
"We believe our market earnings growth forecasts still have downside risk if crude oil and CPO (crude palm oil) prices remain weak (and) margin pressure persists," she said.
In November, the KLCI shed 1.7%, the third consecutive month of decline, amid a torrent of foreign withdrawals largely tracking the government's 2019 budget measures. Foreign investors sold a net 718.90 million ringgit ($172.76 million) of Malaysian equities during the month.
Historically, Malaysia's benchmark FTSE Bursa Malaysia KLCI have posted gains in December for nine years out of the past decade. Analysts however cautioned that Malaysia's corporate earnings-often the backbone of share prices-have been weak for four consecutive quarters, underwhelming investors' expectations.
"Corporate earnings delivery remains one of the key concerns for the Malaysian market," said CIMB's Ivy Ng. She noted that only 11% of 127 stocks covered by CIMB reported above-expectations results, while those below-estimates rose to 38% from 36% in the second quarter.
For CIMB Investment Bank, the KLCI will likely end 2019 at 1,674 points. That implies a 1.80% decline from 1,704 target for 2018 and 0.6% loss from the current 1683.34.
Prospects of any sharp bounce back of the Malaysian equities look bleak as of now. Doubts remain whether the 90-day truce between the U.S. and China over their tariff spat will be extended, while investors wonder over the terms of the ceasefire pact.
The U.S. had agreed to hold off for 90 days on a planned increase in import duties on $200 billion worth of Chinese goods. The decision follows an agreement between the U.S. and Chinese presidents at a G-20 summit in Argentina over the weekend.
"We would focus on trading opportunities with the easing of US-China trade tensions in this two-month period, in anticipation of year-end window dressing and the January Effect, which typically favors bombed-out stocks," said UOB Kay Hian analyst Vincent Khoo.
-- Jason Ng and Gho Chee Yuan