Bursa Malaysia is enjoying one of its best years in well over a decade. The key bellwether index, the FBM KLCI, was up more than 15% in the first eight months of 2024 before retracing slightly at the start of September amid global market weakness. That was its strongest gain since 2009 to 2010, when the market recovered from the steep decline in 2008 (at the height of the global financial crisis).
Notably, the current rally is concentrated on large-cap stocks that make up the FBM KLCI, fuelled by foreign fund inflows. Mid- and smaller-cap stocks, on the other hand, have underperformed since peaking around mid-July. The FBM KLCI gains also coincided with a strong turnaround in the ringgit, from having fallen to the weakest against the US dollar since the Asian financial crisis in February to becoming one of the best-performing currencies so far this year (see Chart 1).
We have written about the factors behind the ringgit’s recovery, including the repatriation of funds by local institutions at the behest of the government. Local institutions have also been big net buyers on Bursa this year.
With expectations for an imminent interest rate cut by the US Federal Reserve, global investors are looking to pivot from US-dollar assets to other markets. Both the Malaysian bond and equity markets saw huge inflows of foreign funds in recent weeks, in anticipation of further ringgit strength and, therefore, forex gains (see Chart 2).
See also: Education lies in the heart of our nation’s problems and the pathway to our solution
Foreign fund inflows into Bursa have been significant, totalling RM4 billion in the last four weeks alone. Since July, foreign fund inflows have totalled RM4.67 billion, which lifted total inflows for the year to date to RM3.84 billion (as at Sept 6).
See also: The pendulum swings right: A pushback against liberal, progressive, interventionist economics
In the longer term, the intrinsic value for stocks — prices and valuations — must be supported by underlying earnings. But it is also reality, especially in the shorter term, that stock and market valuations are driven by momentum — and storytelling. There must be a compelling story to attract investors, which generates liquidity that goes on to create its own momentum. Remember, the equity market is a market for stocks, where prices are determined by demand and supply. Without a story, cheap markets can stay cheap for a long time. Likewise, good storytelling and hype can drive and keep valuations higher and for longer than they should be.
Right now, Malaysia has a pretty good story — one of a stabilising political environment and fiscal consolidation, beneficiary of the China+1 business strategy and rising foreign direct investment (FDI), particularly in tech and data centres. Bursa Malaysia is an under-owned laggard market, with foreign ownership having fallen to 19.5% at end-June 2024, the lowest since 2014, at least. Valuations are hovering at the lower end of the historical range following years of market underperformance, making it easy to justify bullish calls (see Chart 3).
Having said that, we suspect speculations on additional forex gains may, in fact, be one of the biggest motivations at present. Thus, we do not know whether or when this inflow of foreign capital, which is generally short term in nature, will reverse itself. Bear in mind that foreigners have been net sellers on Bursa in eight of the previous 10 years, with outflows totalling more than RM67.4 billion over the entire period. We think the positive momentum is sustainable in the near term, at least, given the strength of the prevailing “story” for Malaysia.
While foreigners and local institutions are net buyers on Bursa this year, retail investors have been the biggest sellers, and almost consistently so. Clearly, retail investors are not convinced of the sustainability of this rally. It is also interesting to note that while gains earlier in the year were relatively broad-based — led by construction, utilities and property sectors driven by the excitement around artificial intelligence (AI) and data centres — the latest surge was centred almost wholly on financial stocks, namely the big banks and, to a lesser extent, the plantation sector. Sectors that gained earlier in the year succumbed to profit-taking, including tech stocks, on growing concern that the global AI hype will fall short of lofty expectations (see Chart 4).
For more stories about where money flows, click here for Capital Section
Will the rally broaden out anew? Or will retail investors be proven right to be sceptical?
Five defensive stocks added to Malaysian Portfolio
We added five relatively low-risk stocks to the Malaysian Portfolio in the previous week. As with the Absolute Returns Portfolio, we will stay invested while remaining cautious.
All the five newly acquired stocks have lower-than-market-average risks, with beta ranging from 0.16 to 0.91 (see Table). The overall portfolio risk remains well below that of the broader market.
We anticipate continued volatility in global markets, given prevailing heightened economic and geopolitical uncertainties. And as we have written previously, Malaysia’s domestic consumption growth remains below pre-pandemic levels and the stronger gross domestic product (GDP) growth in 1H2024 was driven largely by recoveries in oil and gas as well as crude palm oil (CPO) prices, which can be volatile and unpredictable as well as an unreliable source for growth. Meanwhile, export recovery is dependent on global growth. The US economy is undoubtedly slowing while growth remains sluggish in Europe, and China continues to grapple with the fallout from its property sector. Global manufacturing, especially in the eurozone, remains stuck in a rut with weakening in new orders. (The global manufacturing Purchasing Managers’ Index for the US, eurozone and Japan are currently in the contractionary zone. China’s official manufacturing PMI also contracted for the fourth consecutive month in August.)
Worryingly, there are nascent signs of rising manufacturing input costs, which could indicate that goods deflation — that has thus far helped offset higher inflation in services — is coming to an end. This could keep inflation higher for longer — and derail prevailing expectations for up to 1% Fed cuts in the remaining four months of this year.
Gamuda won the coveted The Edge Billion Ringgit Club (BRC) 2024 Company of the Year award. Based on our analysis of the 13 previous winners (2010 to 2022) of the award, the stock prices for all except one outperformed the overall stock market by more than 75% on average over a three-year period. The Company of the Year award is based on rigorous evaluation: quantitative — a combination of profit performance, return on equity (ROE) and returns to shareholders over a three-year period — and a qualitative assessment on corporate responsibility initiatives.
Gamuda has grown its order book steadily in recent years, hitting a record high of RM15 billion in 2022 and rising to RM24 billion currently. The outlook for domestic infrastructure is promising. The company just recently secured the RM3 billion Upper Padas Hydroelectric Dam project (via a joint venture in which it has a 45% stake) and is tendering for multiple key projects including the Penang LRT Mutiara Line (RM4.5 billion) and the Northern Coastal Highway Project (RM6 billion). Management expects the order book to comfortably surpass RM30 billion by year end.
Aside from infrastructure spending, we also expect increasing work orders from continued recovery in the residential property sector. Kumpulan Kitacon is a small-cap construction company whose valuations are still lagging those of its larger peers. Therefore, we believe its shares have limited downside. The company derives some 68% of revenue from the residential segment, with the balance coming from the industrial (16.5%) and commercial (14.7%) sectors. It is sitting on net cash of RM123 million, with a price-earnings ratio (PER) of only 9.1 times and dividend yield of 1.4% (at the point of writing). ROE for the trailing 12 months is 14.8%.
LPI, which has a market cap of more than RM5.31 billion, is the largest listed insurance company on Bursa and among the most profitable. Its combined ratio of 76.9% in 2023 is significantly better than the industry average of 92.9%. Combined ratio improved year on year in 1H2024, owing to a lower net claim ratio. LPI’s gross written premium grew 6.2% last year and accelerated to 8.1% y-o-y in 1H2024. Valuations remain relatively attractive at a PER of 15.6 times and yield of about 5.3% at the current share price, which incidentally is higher than bank fixed deposit rates. The company consistently pays dividends, with the payout ratio averaging 87% in the last five years.
We also added two plantation stocks to the Malaysian Portfolio: United Plantations Bhd and Kim Loong Resources Bhd. CPO price has risen 6.2% in the past month, while the stronger ringgit will lower fertiliser costs. Pre-tax profit for United Plantations increased 28.4% y-o-y in 1H2024, driven by higher production, stable selling prices and lower costs for production. It is one of the most efficient plantation companies in the country, with higher-than-average yields per hectare. Its balance sheet is strong, with net cash of RM465 million. It is also the cheapest of the five largest listed plantation stocks on Bursa by market cap, trading at a PER of only 14.6 times. United Plantations paid out nearly all of its profits as dividends in the past five years. At the current share price, the dividend yield for the trailing 12 months is a high 7.2%.
Kim Loong Resources is a smaller plantation stock with a market cap of about RM2.34 billion. Like United Plantations, the company has reported steady growth in the last quarter ended April 2024, with revenue and pretax profit up 19% and 51% respectively on the back of higher fresh fruit bunch (FFB) and CPO production. Management expects at least 5% higher FFB production for the current financial year ending January 2025. Kim Loong Resources has some RM380 million in net cash. Its shares are currently priced at a PER of 14.1 times, with a dividend yield of 5.4%.
Box Article: Let free competition and private sector drive AI development
Artificial intelligence (AI) systems are here, and they will proliferate. Make no mistake, there is now a global race between nations to develop and embrace AI to gain the upper hand (a competitive advantage) in the future digitalised world. It is for this reason, we think, Khazanah Research Institute (KRI) has proposed that the government establish a central national AI agency to serve as the single focal point for coordinating and implementing Malaysia’s AI strategy. Question: Who will direct this unified national strategy?
We have no doubt the intention of the KRI is good — better coordination should minimise duplication and optimise the use of resources. But given the breakneck speed at which AI technologies are still evolving — even the best and brightest in the world are struggling to know where it is heading — a central national AI agency for Malaysia at this critical juncture is, we think, an overreach. To think a group of bureaucrats can fully comprehend all the complexities, accurately predict the future of AI and make timely and informed decisions to come up with a unified AI strategy is surely far-fetched. Dare we say, even hubris. And hubris inevitably leads to nemesis.
Yes, we must develop and implement regulatory frameworks and policies to safeguard against the misuse and potential harms from the use of AI. Regulators around the world, including those in the US and Europe, have crafted or are in the process of crafting policies to ensure that the application of AI technologies is transparent, ethical, fair and non-discriminatory and safe, respects human rights and protects personal data privacy.
However, to house all AIrelated decision-making under one central national AI agency not only risks creating layers of bureaucracy and red tape — that will surely slow responsiveness to rapid technological changes — but also limit diversity of input and creative solutions, stifle innovation and development. Worse, a perceived top-down approach and concentration of control by a small group of stakeholders — that cannot possibly cater for all the diverse and complex needs of different entities — will ultimately result in public distrust, resistance and delay deployment of AI technologies.
And it will, with absolute certainty, breed more rent-seekers who will seek to control and impede any innovation that threatens their businesses or steal the ideas of others. This is the reality of our track record.
I am reminded of another KRI proposal in 2021, which sought to create a central agency in the Ministry of Housing that would approve all property development projects in the country on the basis that private developers do not know what they are doing — that a group of people sitting in a room, with no vested interest in the financial viability of the projects, would be better informed on the market demand. Is that believable? Or will the central agency have a gatekeeper role, seeking to profit by the power to approve?
The fact is Malaysia failed to move up the manufacturing value chain because of decades of poor economic policies. We ended up lagging regional peers in terms of productivity gains, losing competitiveness in the global market, which contributed to the ringgit’s secular weakness. The digital economy is our best chance to turn the page and start anew. To fall behind once again in AI development, innovation and adoption will lead to dire consequences for the future of the nation. Let the private sector and individual Malaysians innovate to invest and to find their own strategies. Let free competition reign. Let the best and brightest lead.
——— End of Box Article ———
For more detailed financial data analysis on these stocks, and more, you can now AskEdge (at https://theedgemalaysia.com/askedge) or subscribe to AbsolutelyStocks (at www.absolutelystocks.com). AskEdge is a brand-new investing tool from The Edge, which tells you the 12 Things You Must Know About Any Stock listed on Bursa and the Singapore Exchange S68 at your fingertips. It is easy to use (think of it as a simplified Bloomberg), tailored for the individual investor and, best of all, it is absolutely free.
The Malaysian Portfolio fell 1.5% for the week ended Sept 11, performing better than the benchmark FBM KLCI, which fell 1.8%. United Plantations (+4.2%) was the only gainer for the week, while Insas Bhd — Warrants C (-7.5%), IOI Properties Group (-6.9%) and KSL Holdings (-4.0%) were the biggest losers. Last week’s loss pared total portfolio returns to 188.7% since inception. Nevertheless, this portfolio continues to far outperform the FBM KLCI, which is down 10.4% over the same period.
The Absolute Returns Portfolio, meanwhile, ended unchanged last week. Total portfolio returns since inception remained at 7.3%. The top gainers were OCBC (+4.4%), DBS (+1.9%) and Swire Properties (+1.7%), while the biggest losers were Berkshire Hathaway (-5.3%), Airbus (-3.1%) and CrowdStrike (-2.2%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
