Market expected to take a breather before embarking on a potential tech bull cycle

This article was published in The Edge Malaysia Weekly on 1 July – 7 July 2024.

Continued interest in thematic investments centred around artificial intelligence, data centres and key infrastructure developments is expected to help Bursa Malaysia’s shares rise towards the end-of-year target of around 1,700 points set by analysts in the second half of 2024, despite the ongoing market sell-off.

Analysts also expect increased focus on renewable energies such as solar and biomass amid the implementation of the national energy transition roadmap over the past few quarters, while increased trade activity is expected to benefit the shipping and logistics sectors.

“We are advocating the data centre theme as part of a larger new investment cycle theme and will focus on contractors and property companies involved in the initial construction of data centres. With regards to operators, we are being selective as there are demand risks which the market may not be fully aware of,” Chehan Perera, head of research and strategist at CGS International Malaysia, told The Edge.

It slightly revised its year-end FBM KLCI target to 1,760 points from 1,755 points previously, saying its main focus over the past year had been on domestically-led companies and sectors contributing to an expected recovery in private consumption and investment.

“That hasn’t changed. Additionally, we see potential opportunities for upstream-focused planters and affordable technology companies, the latter riding a potential tech upcycle,” he says.

After a strong performance in the first half of the year, Bursa has entered a season of consolidation, which market experts say is healthy and temporary given the strong rise in share prices during this period. As of June 28, the FBM KLCI had risen 10.38% year-to-date, breaching the 1,600-point mark, with overseas inflows outweighing outflows.

The report said foreign investors invested in utilities, transportation and logistics, and technology, while plantations, communications and media, and energy saw the largest outflows.The FBM KLCI closed at 1,590.09 points on Friday as broad-based profit-taking led to a weekly decline in more than 900 stocks on the local bourse.

Another notable investment interest in the first half of the year has been gold, which rose to a record high of US$2,449.89 per ounce on May 20, driven by Middle East tensions and safe-haven demand from central banks. As of June 28, Bursa gold stocks Poh Kong Holdings Bhd (KL:POHKONG) and Tomei Consolidated Bhd (KL:TOMEI) have risen 30.64% and 39.52% respectively since the start of the year, while pawnbrokers Pappajack Bhd (KL:PPJACK) and Evergreen Max Cash Capital Bhd (KL:EMCC) have fallen 5.24% and risen 6.1% respectively.

“Our markets have been performing well, so the recent weakness is a healthy correction and does indeed provide bargain-hunting opportunities, which we have seen several of this week,” Vincent Lau, head of equity sales at Rakuten Trade, told The Edge.

“We’ve seen some short-term corrections and a lot of profit taking in stocks that have risen in conjunction with the data center theme. These are the stocks that have suffered the most so far. But with the right consolidation, they could be a game changer.” [some of the counters] “It could be a good time to buy more. Technology is still hot, but the focus should be on earnings rather than the data centre hype,” said Louis Loh, head of research at Melaka Securities.

Key themes remain strong

“We still believe that public utilities [power and water] “The second half of the year will be strong, with the cybersecurity sector also doing well,” Lo said.

For example, Tenaga Nasional Bhd (KL:TENAGA) is considered a flagship stock in the data center industry. Of the 21 analysts surveyed by Bloomberg, 12 have a buy rating, seven a hold rating and two a sell rating, with a consensus price target of RM14.52.

However, in a June 25 report, Kenanga Research pointed out that “the company’s valuation has been rectified as its share price has risen 40% so far this year, increasing its market capitalization by RM23 billion on the back of a frenzy in data center stocks.”

Meanwhile, Affin Hwang Investment Bank, which upgraded its outlook on the technology sector to overweight from neutral, likes Malaysian Pacific Industries Bhd (KL:MPI), Unisem (M) (KL:UNISEM) and Inari Amertron Bhd (KL:INARI). It also added Frontken Corporation Bhd (KL:FRONTKN) (Buy, price target: RM5.80) which it sees as a beneficiary of chipmakers’ semiconductor node miniaturization, and Vitrox Corporation Bhd (KL:VITROX) (Buy, price target: RM5.15) due to continued demand for testing equipment and its position in Nvidia’s factory automation supply chain.

“While the domestic sector’s price-to-earnings (PE) multiple is currently in line with Nasdaq, we argue there is still room for further re-rating of PE multiples. We believe the sharp increase in sector PE multiples over the past 1-2 months is due to improving earnings in the recent quarterly earnings season,” the investment bank said.

“However, apart from the price catch-up against Nasdaq’s PHLX Semiconductor Sector Index, scarcity and high domestic liquidity due to low concentration of domestic listed tech companies also contributed to the domestic surge. Hence, we believe valuations are likely to see further catch-up (perhaps two standard deviations above the five-year average) as sector earnings recover and investor interest returns accordingly.”

MIDF Research said in a June 28 report that it sees value in lagging sectors, particularly the telecommunications sector, due to clarity on 5G dual network policies and increased demand for fiber optic backhaul, network hubs, undersea cables and submarine cable landing points from new data centres, but believes these are not fully priced into the market.

The research firm continues to favor the construction sector, which will be supported by the rollout of large public infrastructure projects, led by the RM10 billion order for the Penang Light Rail Transit Mutiara Line and the Mass Rapid Transit Line 3 (worth RM45 billion), following a large number of data center jobs. It also focuses on the oil and gas sector (particularly the strong performance of offshore support vessels, floating production storage and offloading (FPSO) and onshore storage segments) and the technology sector, supported by a recovery in the semiconductor and electronics manufacturing services sectors and ample growth opportunities in integrated circuit design and cybersecurity.

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