• We are mildly positive on the market in 2H 2020. We project an end-2020 FBM KLCI target of 1,530 pts based on 18x our 2021F earnings projection (+19.7%), which is in line with its 5-year historical average.

• We believe there is a case for the FBM KLCI’s multiple to stay elevated to reflect the robust domestic liquidity driven by the risk-on sentiment globally triggered by the massive monetary and fiscal stimulus packages put in place by central banks and governments around the globe, optimism on economy reopening and the news flow on vaccine development. Also helping, is the reality that risk-free assets, i.e. cash and Malaysian Government Securities (MGS), are hardly generating any positive inflation-adjusted yield.

• We believe the next driver could come from the return of appetite for risk assets (including emerging market or EM equities), on expectations that the Covid-19 pandemic is to gradually come under control, or simply driven by the need for investors to look elsewhere for opportunities, as valuations of developed market (DM) equities (especially the largecap tech stocks) have become increasingly rich.

• We believe there is a case for staying fully invested in the glove sector as no one knows for sure if the pandemic is going to go away or evolve into another wave, or any effective treatment drug and/or vaccine could be found anytime soon. Post-pandemic, there is a case for staying invested in the sector given the higher hygiene standards and practices of global population.

• The pandemic has accelerated the digitalisation of the economy. New norms such working from home, virtual meeting, distance learning, online grocery shopping and food delivery, have spurred tremendous investment in both software and hardware technology. Meanwhile, on one hand, the pandemic has disrupted the rollout of 5G in certain countries, on the other hand, it has actually sped up the adoption of 5G in a few cities in China out of necessity.

• Automobile has “gate-crashed” the pandemic play club. We forecast a strong 2H 2020 for automobile distributors, driven by a surge in car sales on reduced new car prices thanks to the sales tax holiday (from 15 June 31 Dec 2020) under the short-term National Economic Recovery Plan (Penjana).

• If the economy does recover strongly from the pandemic over the immediate term, there is better chance that most businesses will survive, and hence the risk of a significant uptick in the loan credit cost of the banks at the end of the 6- month loan moratorium will be mitigated. Other sectors that will benefit from the recovery in demand/pent-up demand post-pandemic are healthcare (an increase in semi-elective and elective procedures), power (an increase in electricity demand from the commercial and industrial segments), seaport (higher throughput on a recovery in the global trade), toll road (traffic to normalise) and tourism (a recovery in domestic/regional tourists). Meanwhile, with recovering footfalls to the shopping malls, retail REITs shall gradually take back the rental rebates offered to the tenants, paving the way for the normalisation of distributable incomes.

• We are OVERWEIGHT on automobile, consumer, glove, healthcare, power, REIT and technology. Our Top Buys are Maybank, Tenaga Nasional, Axiata Group, Dialog Group, RHB Bank, Kossan Rubber, Bursa Malaysia, Inari Amertron, MMC Corp and MBM Resources.

Source: AmInvest Research - 1 Jul 2020