Investment Highlights

• We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) but trim our FV by 2.1% to RM1.85 (from RM1.89) (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 1.80 (Exhibit 4).

• In FY18, the ETF reported an investment loss of RM97,828 (comprising gross dividend and interest incomes of RM100,871 and net investment loss of RM198,699), vs. an investment income of RM377,870 in FY17. Having accounted for expenditure and tax, net loss after tax came to RM138,893, vs. a net gain after tax of RM342,428 in FY17 (see Exhibit 1). This is reflective of the generally subdued Malaysian equity market in 2018 during which the FBM KLCI lost 5.9% to 1,691pts from 1,797pts a year ago.

• 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 high P/E stocks during the recent rounds of changes to the FBM KLCI constituents. We forecast the FBM KLCI’s earnings to grow by 4.0% in 2019 underpinned by a GDP growth of 4.5–4.8%.

• 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 4–5 months.

• We acknowledge that the heightened volatility in the financial markets globally seen in 4Q2018 may return at some point, as investors are still grappling with: (1) the still lofty valuations of tech heavyweights; (2) the slowing global growth; and (3) the uncertain outcomes of the trade talks between the US and China, and the Brexit negotiations between the UK and the EU.

Source: AmInvest Research - 28 Feb 2019