KLCI stability holds as macro risks weigh on equity valuations

[MALAYSIA] Analysts predict equity valuations to stay relatively low due to rising macroeconomic risks resulting from recent global trade developments.

The ongoing geopolitical tensions and supply chain disruptions have further compounded investor caution, leading to subdued market sentiment. Analysts note that sectors heavily reliant on global trade, such as technology and manufacturing, are particularly vulnerable to these headwinds. This has prompted a reassessment of growth projections for the second half of 2024, with many firms adopting a more conservative outlook.

Recent data from Bank Negara Malaysia shows foreign investors have been net sellers of Malaysian equities for three consecutive months, with outflows totaling RM2.1 billion since April. This trend aligns with broader emerging market pressures as the US Federal Reserve maintains higher-for-longer interest rates, diverting capital flows to safer assets.

With the deadline for the impending semi-annual review of the FTSE Bursa Malaysia KLCI's components approaching in five weeks, MIDF Research believes the current top 30 blue-chips will remain unaltered, according to the list of constituents as of last Friday's market close. "This will likely be the first semi-annual review without changes in three years," the research house stated in a report released yesterday.

The stability in the KLCI constituents reflects a broader trend of limited market movement among large-cap stocks, as investors flock to defensive plays amid economic uncertainty. Historically, periods of low turnover in index components have coincided with sideways trading patterns, suggesting that the market may remain range-bound in the near term.

Notably, the FBM KLCI has underperformed regional peers like Indonesia's JCI and Singapore's STI year-to-date, gaining just 1.8% compared to their 5-7% returns. Analysts attribute this lag to Malaysia's heavier weighting in export-sensitive sectors and slower-than-expected corporate earnings recovery.

According to MIDF Research, Gamuda Bhd and 99 Speed Mart Retail Holdings Bhd, who were raised to the FBM KLCI at the December 2024 review, have maintained their positions well inside the index, with Gamuda in 20th and 99 Speed Mart in 26th. "No other stocks have risen or fallen to the threshold stated in the ground rules for additions or deletions to the index at the moment," according to the investment firm.

Market watchers highlight that Gamuda’s sustained position underscores its resilience in the construction and infrastructure sector, which has benefited from increased government spending. Meanwhile, 99 Speed Mart’s steady ranking points to the enduring demand for essential retail, a segment that has shown consistent growth despite broader economic challenges.

"Gamuda's RM11.2 billion outstanding order book provides clear earnings visibility through 2026," said Kenanga Research in a separate note, while 99 Speed Mart's aggressive store expansion strategy - targeting 50 new outlets annually - continues to capture Malaysia's growing preference for neighborhood retail formats post-pandemic.

According to MIDF Research, the closest non-constituent to the 25th place is AMMB Holdings Bhd at 28th, with a market capitalisation deficit of minus 3.2% compared to QL Resources Bhd at 25th. While implausible, the accession of AMMB Holdings to the barometer index would result in the relegation of MR DIY Group (M) Bhd, the lowest-ranked constituent at 33rd.

AMMB Holdings’ proximity to the threshold has sparked speculation about potential future inclusion, particularly if banking stocks gain momentum from expected interest rate adjustments. However, analysts caution that such a shift would require significant upward movement in its market cap, which remains contingent on broader financial sector performance.

“For background, a security will only be inserted at a periodic review if it rises to 25th or above while a deletion will happen if a security falls to 36th or below.”