Construction sector to gain from Chinese FDI — Eastspring

KUALA LUMPUR (Oct 6): Malaysia’s construction sector in particular is likely to benefit well from higher earnings next year following increased investments from China, said Eastspring Investments Bhd.

“It’s a strong story. Incrementally, foreign direct investments (FDI) are going to boom and in the case of the construction sector, earnings will pick up,” said Eastspring chief investment officer Rudie Chan.

Chan, speaking on the outlook for the Malaysian stock market, said the earnings per share growth is still hovering around the 5% to 7% range. He said foreign investors may not necessarily be excited about the market at this level, though the growth is trending positively.

In terms of regional valuations, Malaysia is neither cheap nor expensive compared with its regional peers, said Chan.

“It’s not compelling therefore we’ll need a good earnings story for it to come back next year. We foresee stronger earnings growth next year, with a growth rate of 10% to 12% considering the macro factors.

“The strong macro outlook that we have will continue over the next year. The outlook for Malaysian markets looks to be positive, but it could be a slow grind and would need a dramatic improvement in terms of earnings for the market to move significantly higher. It would take a couple of quarters for that to pan out,” he said.

On the ringgit, Chan said it is expected to be plagued by the US rate hike in the short term, though on a longer-term basis it looks undervalued based on factors such as deviation from purchasing power parity as well as Malaysia’s share of global exports.

He said that with the current economic cycle, the ringgit is not expected to go lower anytime soon.

“We’ve got a strong rally this year against other currencies. Year to date, the ringgit has risen 6.3%. [It is] still very much undervalued compared with other currencies,” said Chan, adding that liquidity has been seen flowing back into the Asian market, denoting a positive sign.

Chan added that the upcoming Budget 2018 is likely to be expansionary and spur consumption growth which will be seen over the next couple of quarters.

Meanwhile, speaking on the regional markets’ performance, Eastspring strategist Robert Rountree said high liquidity will remain the main driver with its impact swamping any rate hike, though this will increase volatility.

“Higher volatility is expected on growth in the region moving forward, though there will be more opportunities in other sectors. Some are even overlooked because everyone is too focused on IT (information technology) stocks,” he said.

Rountree added that many low valuations remain in Asia, except for IT stocks, which therefore make the region “incredibly attractive”.

This article first appeared in The Edge Financial Daily, on Oct 6, 2017.

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