FBM KLCI Normalizing

After  a  brilliant  2013,  the  FBM  KLCI  may  underperform  its  peers  in  2014

Reversion  to  mean  valuation. In  our  Strategy  note  dated  8  January,  we  highlighted  that  the  comparative valuation of the FBM KLCI surpassed all its regional peers and “the glaring disconnect between the valuation of the local  benchmark  vis-à-vis  its  regional  counterparts  leads  us  to  believe  that,  going  forward,  there  is  a  greater tendency for the FBM KLCI to revert back towards its mean PER, rather than otherwise.”

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…has  arguably  beginning  to  take  hold. Based  on  latest  weekly  data,  the  mean  reversion  tendency  has  in  fact beginning to take hold as  the market valuation of regional indices is already showing an early sign of normalizing. From the Table above, it is rather apparent that equity benchmarks which were trading at levels below their longterm mean PER, i.e. SD of less than zero, recorded week-on-week expansions with regard to their current year PER valuation.  On  the  other  hand,  equity  indices  which  were  trading  at  a  premium  valuation  to  its  secular  average showed week-on-week shrinkages.

 

Fundamentally,  FBM  KLCI  valuation  may  be  capped  by  liquidity,  earnings  and  monetary  factors. We  reiterate our view that, going forward, the FBM KLCI above-mean current year PER valuation may be capped by the following possible headwinds: (i)measured albeit incessant withdrawal of foreign liquidity pursuant to the commencement of QE3  taper,  (ii) relatively  muted  FBM  KLCI  earnings  growth  of  circa  10%  in  2014,  (iii) expectation  of  a  hike  in  the OPR, as well as (iv)Malaysia’s relatively weak albeit improving current account situation.

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After  a  brilliant  2013,  the  FBM  KLCI  may  underperform  its  peers  in  2014. The  reversions  to  mean  valuation, ceteris  paribus  (i.e.  no  concomitant  change  in  earnings),  have  a  direct  bearing  on  the  price  performance  of  the respective  indices.  Therefore,  without  favourable  earnings  revision,  the  FBM  KLCI  which  commanded  the  richestrelative  current  year  PER  valuation  among  its  peers  was  also  the  hardest  hit  so  far  this  year  at  -2.30%.

Reiterate FBM KLCI 2014 year-end target of 1,900 points. Hence, our rather modest FBM KLCI baseline 2014 yearend target of 1,900 points

 

by MIDF

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