Steer clear of costly Malaysian equities, investors warned

Valuations are the second-highest in ASEAN.

Malaysian stocks have fallen by around 30% in US dollar terms since the beginning of the year, but analysts at HSBC still believe that prices in the Malaysian bourse are unjustifiably high.

A report by HSBC highlighted that Malaysia has the second-highest equity valuations in the region as 14.6x forward earnings.

“There has been some decline in multiples, but equities look expensive, especially as ROE slides lower. Malaysia traded at a forward PE of 13x during September-October 2011, so multiples can fall further,” said HSBC. 

The outlook for Malaysia isn’t very promising either, as low commodity prices have hurt crude and palm oil exports. At the same time, households are reeling from high household debt and, more recently, the implementation of the goods and services tax (GST). 

Further, HSBC believes that Malaysia’s sovereign rating will be downgraded as the leveraged economy has deteriorated.

Although local funds can keep valuations high for the time being, HSBC believes that there enough reasons to be cautious about Malaysian stocks.

“Domestic funds, willing to build equity exposure, have been able to keep multiples higher. This could continue but for now, with earnings at risk coupled with some de-rating, we remain cautious on Malaysian equities,” said HSBC.