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1Q2018 Market Outlook – All Eyes on Election

The Malaysian stock market is expected to remain on a purple patch leading up the upcoming 14th General Election, which may be held by end of 1Q2018 or in early 2Q2018. As it is, the key index has climbed above the 1,800 points level amid the expectations of a sustained uptrend ahead and we see much of the potential gains emanating from speculative fervour along with hit-and-run tactics that could also result in substantive volatility.

Apart from the election theme, the market will also ride on other drivers that include the government’s ongoing infrastructure developments that will benefit the construction and building materials sectors. The firmer oil prices could also give a new lease of life to oil and gas players, while a firm economic outlook where the projected GDP growth of 5.0%-5.5% for 2018 will likely provide additional impetus for the market, particularly on export and technology-related companies that are beneficiaries of the stronger external sector as well consumer stocks where we see domestic spending remaining firm on the government’s various measures to address the higher cost of living. We also see politically linked stocks regaining some lustre as these stocks are likely to see an increased speculative interest.

Although we see Malaysian stocks staying on the ascend and remain elevated over the next few months, we also see bouts of consolidation and profit taking as the upsides are likely to overshoot on occasions that would leave it overbought. The gyrations in global stock markets could also temper the upsides, but we think the consolidation spells should be short-lived as bargain hunting activities will likely provide ample support for the Malaysian stock market to hold up in the months leading to the upcoming general election.

Valuation-wise, the FBM KLCI trades at PERs of 15.9x and 14.8x for 2018 and 2019 respectively, which are fair as they are within its historical average of 14x-16x. However, we are also consonant that valuations are likely to stay elevated and could still exceed its historical range in view of the ongoing trading activities that would also continue to draw-in foreign funds as Malaysian equities play catch up to the strong gains in regional peer equity markets in 2017.

With further upsides in the offing over the coming months, we believe a more aggressive strategy could be suitable to take advantage of the expected upsides on Bursa Malaysia as the local bourse also plays catch up the substantive gains that the regional peers recorded in 2017. The upsides will spur further trading plays and will help to keep market breadth on high – a sign of a healthy market.

On the upside, we think the key index could head to the 1,870-1,893 points level – the latter being the all-time high closing and implying a potential upside of 1.5% – 3.0%, but we do not think that a new high can be formed as yet, given that the country’s economic environment and corporate earnings growth is still very much on the modest side. In the meantime, there should be firm support at the 1,750-1,780 levels ahead of the upcoming General Election, with the market backed by rotational and bargain hunting activities.

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