Investment Highlights

We maintain our end-2019 FBM KLCI target of 1,680pts

• Stock market indices provider FTSE Russell has retained Malaysia on its FTSE World Government Bond Index (WGBI) watch list for potential downgrade during the just announced September 2019 review. The next review will only be due in March 2020. This is negative to the market as it means the overhanging concern on potential US$8bil (RM33.6bil) foreign outflows from the Malaysian bond market in the event of a downgrade will not immediately go away. Apart from Malaysian bonds, a downgrade would hurt the ringgit, and in turn, the appetite for Malaysian equities as well.

• Nonetheless, we are maintaining our end-2019 FBM KLCI target at 1,680pts based on 17x our 2020F earnings projection (+7.6%), which is at a discount to its 5-year historical average of about 18x. 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 zeroyielding precious metals.

• Typically, an easing cycle in the US shall usher in a new capital inflow cycle to EMs, including Malaysia, as investors step up the 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.

Our Top Buys

• Amidst the heightened US-China trade tensions and a mounting global recession risk, we anchor our stock selection on:

1. Value stocks – Malayan Banking (discount to historical P/B ratio, dividend yield of 6–7% p.a.), RHB Bank (0.8–0.9x P/B ratio) and Serba Dinamik (steep discount P/E valuation to peer Dialog Group);

2. Defensive plays in a low interest rate environment – Tenaga Nasional (also potential rerating via a demerger exercise);

3. Beneficiaries of the US-China trade war/trade diversion – Top Glove (tariff advantage over Chinese exporters in the US market), Westports and MMC Corp (trade diversion from the US-China trade war, as reflected in the increased throughput recently); and

4. Domestic consumption proxies – DRB-Hicom (also Proton’s turnaround), MBM Resources (also Perodua’s dominance in the local auto sector) and Berjaya Food (consumer lifestyle and experience) (Exhibit 5).

Source: AmInvest Research - 27 Sept 2019