Investment Highlights

• We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) but trim our FV by 0.5% to RM1.89 (from RM1.90) (Exhibit 5). Our FV is based on our fair values (for stocks under our coverage), consensus fair values (for stocks not under our coverage) and last traded price (for Hap Seng Consolidated, which is not under any coverage). It is at a slight premium to its NAV of RM 1.75 (Exhibit 4).

• During the semi-annual review on FBM KLCI in December 2018, the index providers, FTSE Russell and Bursa Malaysia, decided to remove two constituents, namely, Telekom Malaysia and KLCCP Stapled Group, and replace them with Top Glove Corp and AMMB Holdings, with effect from 24 December 2018. We are reflecting these changes in our revised valuation.

• We project an end-2019 FBM KLCI target of 1,820pts based on 18.5x our projected 2019 FBM KLCI earnings. This is at a 1.5x multiple premium to the 5-year historical average of about 17x, largely to reflect the introduction of largely high P/E stocks during the recent rounds of changes to the FBM KLCI constituents. We forecast FBM KLCI’s earnings to grow by 4.0% in 2019 underpinned by a 4.5% GDP growth.

• We believe the key catalyst to the local equity market in 2019 will be the return of global investors to the emerging markets, on a growing consensus that the US rate hike cycle and hence the USD upcycle are tapering off. In fact, the return of global investors to the emerging markets has started since October 2018. Despite the turmoil in the global financial markets since 4Q2018, emerging market equity funds have consistently attracted net inflows over the last 11 weeks.

• We acknowledge that the heightened volatility in the financial markets globally since 4Q2018 is likely to persist into 2019, as the market is still grappling with: (1) the lofty valuations of tech heavyweights against scaled back growth expectations; (2) the recent free-falling of the oil price that has stirred a déjà vu of the oil price rout in 2014; and (3) the trade tension between the US and China.

• Locally, a number of key sectors have been impacted by policy changes after the 14th general election (GE14) including telcos (reduction in broadband rates), construction (cutback in public infrastructure projects, renegotiation of existing contracts), gaming (higher casino taxes) and power (discrepancy in fuel cost passthrough). Also, the government’s plan to monetise assets to pare down the national debt has given rise to a share overhang concern in the market. However, with the economy being slowly but surely cleansed of rampant corruption, we believe Corporate Malaysia will stand a much better chance of realising its full potential.

Source: AmInvest Research - 3 Jan 2019