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AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 6 Dec 2019, 9:01 AM

 

Malaysia - Inexpensive for a Defensive Market

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Summary

  • We maintain our end-2019 FBM KLCI target of 1,820pts, which is based on 19x FY19F earnings (+0.4%) and 18x FY20F earnings (+8.5%), in line with its 5-year historical average of 18x.
  • Our simulation shows that our end-2019 FBM KLCI target of 1,820pts is within reach, assuming core FBM KLCI component stocks trade at these levels: Maybank (RM9.65), Public Bank (RM24.95), Tenaga (RM15.05), Petronas Chemicals (RM9.25), IHH Healthcare (RM6.25), CIMB (RM5.65), Axiata (RM5.45) and Digi.Com (RM5.35).
  • We believe the near-term catalysts to the local equity market could potentially come from:

1. FBM KLCI’s inexpensive valuations from a historical standpoint;

2. The easing cycle in the US, ushering in a new capital inflow cycle to emerging markets (EMs) including Malaysia, as investors return to the game of yield hunting;

3. Earnings surprises from Corporate Malaysia driven by improved efficiency, particularly in government-linked companies (GLCs) and better pricing power amidst consolidation in various sectors;

4. The pendulum of the US-China trade/tech tensions swinging from escalating to easing; and

5. Optimism on Malaysia’s longer term economic prospects driven by trade/FDI diversion to Malaysia amidst the USChina trade/tech war.

  • The easing cycle in the US also translates to relative strength in EM currencies vs. the USD, or at the least, a cap on the rise of the USD vs. EM currencies. We expect the US Federal Reserve to cut the fed funds target rate by 25bps each during the July and September Federal Open Market Committee (FOMC) meetings, from 2.25%–2.50% to 1.75%–2.00%.
  • Assuming investors are to start piling into EM equities, we expect foreign portfolio inflows to Malaysia to eventually turn positive more decisively. Using the iShares MSCI Emerging Markets ETF as a guide, Malaysia’s weighting in this benchmark emerging market equity fund currently stands at 2.1%. Seemingly small, Malaysia is nonetheless ranked on the 10th spot, which is behind Thailand (2.9%) but ahead of Indonesia (2.1%) and the Philippines (1.1%).
  • However, we are mindful of headwinds such as a sharp slowdown in the global economy, a prolonged US-China trade/tech war, escalating geopolitical tensions in the Middle East, etc. These could potentially nullify the accommodative monetary policy from major central banks in the world. We also acknowledge that despite the FBM KLCI’s underperformance in 1H19, it still trades at a premium vs. both developed markets (DMs) and EMs.
  • In terms of sector, we are OVERWEIGHT on banks, consumer and telecommunications (upgraded). Our top picks are Maybank, RHB Bank, Axiata, Dialog, Serba Dinamik, Top Glove, Malaysia Pacific Industries, Bermaz Auto, Berjaya Food and Malayan Flour Mills.

Source: AmInvest Research - 1 Jul 2019

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