Investment Highlights

We cut our end-2019 FBM KLCI target to 1,680pts from 1,820pts

• There was literally zero “wow” factor in the just-concluded 2Q2019 quarterly results, with none of the FBM KLCI component stock under our coverage beating our projection, while eight of them actually coming in below our forecasts (Exhibit 1). Having reflected earnings changes, we revise down our projected FBM KLCI growth rate in 2019F to -2.9% (from 0.4% prior to the results) but raise 2020F to 9.3% (from 8.5% previously) due to the low-base effect.

• We are cutting our end-2019 FBM KLCI target to 1,680 pts based on 17x our revised 2020F earnings projection at a discount to its 5-year historical average of about 18x. This compares with 1,820pts based on 18x our previous 2020F earnings projection.

• 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 (Exhibits 1 & 3). We were hopeful then that the inflows would eventually spill over to equities but this did not materialise (Exhibits 2 & 4).

• 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 a mounting global recession risk, as illustrated in the flattened, and at times, inverted US bond yield curve.

Source: AmInvest Research - 4 Sept 2019