KUALA LUMPUR: Rakuten Trade Sdn Bhd suggests that the FTSE Bursa Malaysia KLCI (FBM KLCI) index has the potential to exceed the 1,700 threshold if foreign fund inflows revert to normal levels.
Kenny Yee Shen Pin, the head of research at Rakuten Trade, emphasised that a consistent flow of foreign investments would bolster Malaysia's standing in the stock market.
"We expect the FBM KLCI to reach 1,660 points by the end of this year based on a 15.5 times price-to-earnings ratio (PER) with a 16 per cent earnings growth.
"If foreign fund inflows return to normal, we may see the index surpassing the 1,700 mark based on just a 16 times PER," he said during the virtual media briefing on Malaysia's Second Quarter (2Q) Market Outlook today.
Nevertheless, Yee said that although foreign investors are returning to Asia, they lack the staying power primarily affected by ongoing global uncertainties, such as the interest rate drama, the Middle East war, geopolitical tension, and more.
He also added that the more records Wall Street breaks, the more vigilant Malaysia may have to be, as the US remains the epi-centre of global market volatility.
On that note, Yee said that unlike in 2023, foreign fund inflows into the equity market are quite apparent, but the progress has been rather erratic.
He said this could be due to a selective portion that intends to find stability rather than going through the vagaries on Wall Street.
He added that this can also be a prelude to or start of certain portfolio diversification among foreign funds, albeit on a smaller scale.
"Foreign shareholding touched its lowest point at the end of 2021, reaching only 11.35 per cent, while the nation was suffering from Covid while undergoing a political transition.
"Fast forward to 2023, we noticed a marked improvement in foreign shareholding amid a more stable political climate in the fourth quarter of 2023 (4Q23) until now.
"Therefore, we are confident that foreign shareholding will surpass the 20 per cent threshold and test the 25 per cent level since Malaysia has been shunned and underinvested by foreign investors for so long," he said.
Meanwhile, Yee also highlighted that retail participation had been steady until a selective group of small caps experienced an abrupt, sharp sell-down.
He said this mini contagion affected retail participation, which dipped to a low of 20 per cent from around 26 per cent before.
"Though we view this as a knee jerk reaction, given the time to heal from the trauma, we believe retail participation should revert to normal," he noted.
Commenting on ringgit, Yee said the current exchange rate of Malaysia's currency does not truly reflect the country's improving environment.
Therefore, he said Rakuten Trade believes that the ringgit will strengthen against the US dollar to between the range of 4.50 and 55 by the end of this year, supported by interest rate cuts in the US and the European Union (EU), as well as an increasingly favorable investment climate domestically.
"I believe that the US interest rate cuts will still happen, and they will be positive for the ringgit.
"Last year, many experts forecasted that the Federal Reserve (Fed) was expected to cut rates six times in 2024.
"Following the postponement, they reduced the expectation four times. For the Rakuten Trade, we expect the Fed to cut rates by around two per cent," he said.
Meanwhile, Rakuten Trade vice president of research Thong Pak Leng said that the banking, construction, telecommunications, and semiconductor sectors are expected to be investors' choices based on the current developments in the country's economy.
He noted that the banking sector will support economic growth, while in construction, the government has announced various mega projects, and more projects are expected to be announced later.
As for semiconductors, he said they will be driven by the demand for artificial intelligence (AI), where production is also expected to soar, further boosting the income of this sector.
