HSBC lifts Malaysian stocks to 'neutral' from 'underweight'

KUALA LUMPUR (Sept 24): HSBC has upgraded Malaysian stocks to ‘neutral’ from an ‘underweight’ call, betting on stronger corporate earnings and better liquidity while the economy benefits from strong foreign investment.

The FBM KLCI could end the year at 1,740 versus the previous target of 1,680, according to HSBC. The country’s benchmark index could further climb to 1,920 by the close of 2025, the research house said, for a potential return of 15% from the current level. 

“We believe the market is in a sweet spot — lower bond yields in the US and a stronger ringgit should boost earnings for domestic companies, enhance liquidity, and drive overall market performance,” HSBC wrote. “The economy also benefits from strong foreign investment.”

Malaysian stocks had been on HSBC’s ‘underweight’ rating since October 2022, and the latest upgrade follows the footsteps of Goldman Sachs, Morgan Stanley and Nomura. The KLCI has gained more than 14% so far this year, largely driven by strong gains of banking stocks.

Institutional investors, particularly foreign fund managers, have also been buying Malaysian stocks at a time when the economy has performed better than expected. In the last three months alone, close to RM5 billion have flowed into Malaysian equities from abroad.

Despite the spike in foreign buying in recent months, “investor positioning is still not crowded”, HSBC said. The KLCI is trading at 14 times 12-month forward earnings, largely in line with the five-year median, while the consensus forecast points to earnings growth of 20% in 2024 and 10% in 2025.

Structurally, however, Malaysia has positioned itself as a crucial link in the global tech supply chain, HSBC said, noting European and American companies’ recent decisions to move to or expand their manufacturing facilities in the country amid ongoing trade tensions.

The inflow of foreign investment is benefiting sectors ranging from equipment makers and chip designers to testers, construction companies and power producers, HSBC flagged. 

Malaysia is also well positioned to benefit from the increase in data centres amid increased demand for cloud and artificial intelligence services, with large tech giants already investing heavily in the market, the house said.

“We believe utilities and industrials are best placed to benefit from this trend,” HSBC said.

Malaysia’s macroeconomic picture also looks “encouraging”, HSBC added, drawing comfort from the global tech upcycle powering its key manufacturing sector and construction of large-scale projects, such as data centres, while the tourism revival also appears on track.

Economic growth accelerated faster than expected, and expanded 5.9% year-on-year in the second quarter of 2024, thanks to stronger household spending, business investments and exports.

HSBC also turned more positive on Asean as the region “benefits a lot” from lower US bond yields, as the expected US Federal Reserve rate cut cycle introduces fresh liquidity into economies and markets. “We believe the rate cuts will be positive for growth and market liquidity,” the house said.

Regionally, the house upgraded the Philippines to ‘neutral’ from ‘underweight’, and raised Indonesia to ‘overweight’ from ‘neutral’.

“Malaysia is attracting more investment in data centres and cloud services, and consumers in the Philippines are doing well, moving from wet markets to malls,” HSBC added. “In Indonesia, lower rates may invigorate growth.”