As the global equity markets show resilience, the Malaysian stock market is poised for broader participation beyond its traditionally dominant sectors. Recent data reveal a positive shift in market breadth, driven by a recovery in the US equity markets and an improved outlook for Malaysian equities.

Global Market Dynamics and Malaysia's Prospects

US equity indices have shown recovery from earlier sell-offs, with the Dow Jones rising 2.6% over the week and gaining 15.4% year-to-date. The S&P 500 and Nasdaq have also demonstrated solid performance, increasing by 10.3% and 18.4% respectively, since the beginning of the year. This recovery is bolstered by a broader market participation that extends beyond the major tech giants, suggesting a more sustainable rally.

In Malaysia, a similar broadening of interest is anticipated. The Kuala Lumpur Composite Index (KLCI) has been largely driven by utility stocks, with YTL Corp., YTL Power, and Tenaga Nasional showing notable gains. However, the property and construction sectors, which have also performed well this year, have not yet had their component stocks included in the KLCI. This may change with the upcoming semi-annual KLCI review in December, with potential inclusions such as Sunway and Gamuda.

Banking Sector Revival and Consumer Sector Growth

The banking sector, a significant component of the KLCI, is experiencing a revival. This is supported by strong macroeconomic data and increased foreign investment. RHB Bank's recent results, which met expectations, have led to an upgrade to a BUY rating, with revised earnings forecasts and an increased target price to MYR6.80. This optimism is reflected across the sector, with AMMB and CIMB also posting positive results and special dividends.

Consumer sectors are showing signs of growth as well, buoyed by increased spending from EPF Account 3 withdrawals and a civil service pay hike. The stronger Ringgit is expected to help reduce costs for USD-denominated goods, potentially boosting margins. Stocks such as MR D.I.Y., QL Resources, and mid-cap companies like Farm Fresh and AEON are poised to benefit, although tech and semiconductor stocks may face challenges due to currency strength and subdued sector performance.

Tech Sector Challenges and Future Outlook

The technology sector, traditionally a growth leader, is facing headwinds. Weak 2Q24 results from Frontken have led to a rating downgrade, while other major tech players like Inari and ViTrox are also struggling. Despite these challenges, opportunities remain in the software space. Companies like MYEG, which focuses on DeFi-driven solutions, and ITMAX, known for smart city solutions, have reported strong growth and continue to attract investor interest.

As Malaysia looks to diversify its equity market and embrace a broader range of sectors, the evolving landscape presents both challenges and opportunities. The shift towards a more inclusive market breadth could enhance the investment prospects for Malaysian equities in the coming months.

Source: Maybank
Title: Improving Market Breadth