Fitch takes the fear factor out of Malaysian equities

An unexpected but positive outlook review from debt rating agency, Fitch Ratings, drove the KLCI today, taking away one of the two fear factors that have reduced foreign interest in Malaysian equities to minimal levels, said Citi Research.

Fitch revised its outlook on Malaysia to stable from negative and reaffirmed the country's long-term foreign and local sovereign credit rating at A- and A.

Notably, Fitch pointed improving fiscal finances (deficit falling from 4.6 per cent of Gross Domestic Product (GDP) in 2013 to 3.8 per cent in 2014), the post implementation of the Goods and Services Tax (GST) and fuel subsidy reform.

In a research note, Citi Research said finding a proper financing resolution for sovereign entity 1Malaysia Development Bhd (1MDB)'s debt portfolio remained the key challenge if foreign investors were to look again at Malaysian equities.

It attributed the KLCI's weakness, thus far, to weak earnings, poor consumer sentiment and impact of debt deleveraging.

"A weak ringgit helps exporters but transmission of benefits to the wider economy takes time.

"Stronger exports, greater foreign direct investments (FDIs) trends and visible project announcements were the key catalysts for foreign investors to re-engage," it said.

Stronger-than-expected tax collection that included GST and income tax would also help investors’ perception on the government’s ability to execute.

Despite a weak earnings trend, Citi Research noted that foreign investors were investing in Malaysia lately and this suggested that investors were slowly but surely coming back to the country.

It added that stocks owned by foreigners and sold in the past quarter rebounded well today.

Citi Research’s top picks included Public Bank, IJM Corp, Tenaga, MAHB and Top Glove.