• We believe the market will do better in 2020 amidst low expectations. We project an end-2020 FBM KLCI target of 1,670pts based on 17.5x our 2020F earnings projection (+7.5%), which is still at a 0.5x multiple discount to its 5-year historical average of about 18x, largely to reflect the less active participation (as compared to the recent past) of both foreign and local institutional investors in the market.

• The catalysts for a market rerating in 2020 could potentially come from: 1. Investors’ increased appetite for risk assets, particularly emerging market (EM) equities, including Malaysian equities, conditional upon: (i) the US Fed is to maintain its narrative of not tightening monetary policy (which shall keep the dollar’s strength in check); (ii) the sustained high equity valuations in developed markets (DM), prompting investors to look elsewhere for opportunities, including EM equities; (iii) the US-China trade tensions are to ease; and (iv) the global recession risk is to continue to moderate; 2. A change in Malaysia’s perceived country risk premium following significant political events; and 3. A play on the ringgit, driven by events such as: (i) FTSE Russell is to retain Malaysia in the World Government Bond Index; (ii) a steep rise in crude oil prices (Malaysia is a net exporter of oil & gas); and (iii) an end to the easing cycle with only another 25bps cut in the overnight policy rate by Bank Negara Malaysia (BNM) in 2020.

• A new equity inflow cycle to EMs has already manifested itself in the latest weekly global fund flow numbers. EM equities have already attracted net inflows since end-Oct 2019 (after flying under the radar of investors for most of 2019). We believe it will eventually show up on Malaysian shores, given Malaysia’s weighting in the MSCI Emerging Markets Index, which we believe, while small at 1.9%, is still relevant.

• Following a major underperformance in 2019 vs. both EM and DM, the FBM KLCI is now trading in line with DM in terms of P/E (vs. at a premium previously), but still at a substantial premium over EM. However, the premium may be justified (at least partially) by the virtue of certain local institutional market participants occasionally stepping in to provide liquidity in times of extreme market volatility.

• In terms of sector, we are OVERWEIGHT on banks, consumer, oil & gas and utilities. Our top picks are Maybank, Tenaga Nasional, RHB Bank, Westports, Kossan, Serba Dinamik, DRB-Hicom, MMC Corp, MBM Resources and Guan Chong.

Source: AmInvest Research - 12 Dec 2019