Investment Highlights

• We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) but trim our FV by 1.1% to RM1.83 (from RM1.85) (Exhibit 2). 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 premium to its NAV of RM 1.67 (Exhibit 3).

• In 1H2019, the ETF reported an investment income of RM16,251 (comprising a gross dividend income of RM50,392 and a net investment loss of RM34.141), vs. an investment loss of RM138,666 in 1H2018. Having accounted for expenditure and tax, it registered a net loss after tax of RM4,101, vs. a much larger net loss after tax of RM160,940 in 1H2018 (see Exhibit 1). This is reflective of a more stable Malaysian equity market in 1H2019 during which the FBM KLCI only lost 1.1% to 1,672pts from 1,691pts, vs. a much more significant drop of 5.9% to 1,692pts from 1,797pts in 1H2018 in the aftermath to the change in power following the 14th general election.

• We are cutting our end-2019 FBM KLCI target to 1,690pts based on 17x our 2020F earnings projection, at a discount to its 5-year historical average of about 18x. This compares with 1,820pts based on 18x our 2020F earnings projection previously.

• We now hold the view that the FBM KLCI is unlikely to trade in line with its historical average, at least over the immediate term, as we believe the risk-off trade will prevail over the rest of 2019. Investors are likely to continue to lighten their positions in high-risk asset classes, i.e. equities and emerging market (EM) assets, while seeking refuge in safe-haven asset classes, i.e. developed market (DM) bonds and even zero-yielding precious metals.

• Typically, an easing cycle in the US shall usher in a new capital inflow cycle to EMs including Malaysia, as investors hunt for yield. This was the case in June and July 2019 when EM bond funds and Malaysian Government Securities (MGS) both attracted substantial net inflows. We were hopeful then the inflows would eventually spill over to equities but it did not materialise.

• As it stands now, the tailwind of accommodative monetary policy by key central banks in the world has been negated by the headwinds of the heightened US-China trade tensions and global recession risk, as illustrated in the flattened, and at times, inverted US bond yield curve.

Source: AmInvest Research - 29 Aug 2019