KUALA LUMPUR (Nikkei Markets) -- Malaysian corporates' earnings are likely to rebound thanks to rising commodity prices, aiding in part to lift shares in 2020 in a market currently pressured by net foreign outflow through the second straight year.
The FTSE Bursa Malaysia KLCI, the worst-performing benchmark index in Asia for 2019, may climb to 1660 by the end of next year, according to the median forecast of 13 analysts polled by Nikkei Markets. That represents a gain of 3.5% from today's closing level of 1604.23.
While analysts expect companies in the benchmark 30-stock index to grow their aggregate earnings by an average 6.4% in 2020 on the back of rising crude palm oil prices and higher spending in the oil and gas sector, investors remain cautious amid lack of policy clarity as Malaysia heads towards a potential change in premiership. It is unclear whether 94-year-old Mahathir Mohamad will hand over the prime minister-ship to coalition partner Anwar Ibrahim next year as was widely expected.
"We are a bit directionless," said Phillip Capital's Chief Strategist Phua Lee Kerk. "The biggest issue now is that nobody knows where the country is heading and that's why foreign funds may not find it exciting to come in due to lack of story in the market."
Malaysia's KLCI has declined 5.1% year-to-date as foreigners dumped local equities worth more than 11 billion ringgit ($2.66 billion) on a net basis. In November alone, foreign investors have net sold Malaysian shares worth nearly 1.6 billion ringgit.
The latest September-ended quarterly earnings have largely disappointed investors, already spooked by lingering U.S.-China trade tension and concerns over slowing global economic growth. If the sell-down persists, total net outflow in 2019 may top last year's 11.69 billion ringgit.
Lackluster performance of banks in particular have weighed on the KLCI. Bank Negara Malaysia cut the overnight policy rate in May for the first time in nearly three years to perk up growth in a slowing economy. Lower interest rates however, eroded profits of banks which account for about a third of the KLCI's weightage.
Still, analysts remained optimistic of a turnaround in fortune for key sectors such as plantation and oil and gas. Higher crude oil prices will likely spur sectoral plays to raise capital expenditure, boost contract flows and swell orders in hand, they said.
In addition, crude palm oil prices have risen more than a third this year and may rise further next year on potential supply shortfall in Malaysia and in Indonesia, which together account for close to 90% of the world's output.
That may drive profits higher of plantation plays by as much as 64% in 2020, said UOB Kay Hian's Head of Research Vincent Khoo. "Visibility is high for corporate Malaysia to finally deliver growth in 2020, after four years of flattish earnings," he noted.
Malaysian equities have struggled to post sharp gains due to its perceived defensive nature and sticky valuations at around 15 times forward earnings. In contrast, Singapore's Straits Times Index has advanced nearly 5% and even Hong Kong's Hang Seng Index has climbed nearly 8% amid months-long civil unrest.
"We expect the foreign fund selling to subside in 2020 as most of the foreign institutions are already underweight on Malaysia, and some of the concerns highlighted that led to the fund outflows have been priced in," CGS-CIMB Analysts Ivy Ng and Michelle Chia wrote in a note to clients.
The ongoing tariff tussle between the U.S. and China, both major trading partners of the Southeast Asian country, coupled with policy uncertainty have prompted many corporates to trim financial targets, cut operating costs, squeeze capital expenditure, and broaden revenue sources.
However, there is a risk that the global uncertainties may generate a vicious cycle where rising pessimism leads to cutbacks in the corporates' capital expenditure cycle, KAF-Seagroatt & Campbell Securities' Analyst Benny Chew cautioned.
"A sell down to our index target should trigger a rebound but it may not be supported by earning upgrades given stubborn domestic headwinds," he added.
--Gho Chee Yuan