• We project an end-2021 FBM KLCI target of 1,770 pts based on 17.5x our 2021F earnings projection (+45.9%). The outlook for equity markets globally, Malaysia included, is positive in 2021F, driven largely by the optimism on a synchronised global economic recovery as the world emerges from the Covid-19 pandemic. Throughout 2021F, the world population shall gradually get vaccinated, paving the way to herd immunity and the eventual end to the pandemic.
• We believe the recovery-focused investment theme from end-2020 will extend well into 2021F. Investors will continue to accumulate recovery plays, i.e. fundamentally strong names in the banking, power, oil & gas, consumer, REIT and transport sectors, while lightening their positions in pandemic plays, i.e. glove makers and selected excessively priced technology names. While the FBM KLCI could be lifted higher as investors chase up recovery plays, particularly, the index-heavy banking stocks, there could potentially be a drag from weakness in share prices of pandemic plays, particularly, glove stocks.
• The fundamentals of banking stocks should improve in line with the economic recovery. While clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses, and hence asset quality of banks, we take comfort that banks have started to make pre-emptive provisions in the form of management overlays, in addition to provisions based on changes to macroeconomic factors.
• Other key sectors that are poised to benefit from the recovery are power (increased demand for electricity, particularly, from the commercial and industrial segments), oil & gas (higher crude oil prices), seaport (higher throughput on the recovery in global trade), airport (the eventual reopening of borders), consumer (cash handouts and recovery in the job market to sustain consumption) and REIT (reduced rental rebates, recovery in footfall and occupancy). Meanwhile, while the availability of effective vaccines has greatly brightened the recovery prospects of the air travel sector, we remain mindful of the need for airlines to recapitalise its balance sheet after months of massive losses during the pandemic.
• We expect Bank Negara Malaysia to hold its benchmark overnight policy rate (OPR) at 1.75% throughout 2021F, in sync with the accommodative monetary policy stance expected from key central banks in the world in 2021F. The sustained low interest rate environment (coupled with the recovery narrative) will continue to make equities an attractive asset class for local investors. We expect domestic liquidity (from both institutional and retail investors) to remain robust in 2021F and shall continue to neutralise foreign selling if any, as it did in 2020.
• We acknowledge that our market has been flying under the radar of foreign investors (due to Malaysia’s insignificant and shrinking weighting in MSCI Emerging Markets Index, the market’s inherently high valuations, coupled with the lack of tech start-up listing). On the flip side, there is a silver lining to the low foreign participation in the local market. Dominated by local participants, the market has remained calm in the face of a dynamic local political landscape.
• Sector-wise, we are OVERWEIGHT on automobile, consumer, electronic manufacturing service (EMS), financial, healthcare, oil & gas, power, REIT, telco and transport. Our top picks reflect names that are likely to benefit from the recovery of the domestic and global economies, i.e. Maybank, Tenaga Nasional, Axiata Group, RHB Bank, Dialog Group, Westports, Malaysia Airports, IGB REIT, MMC Corp and Kumpulan Powernet.

Source: AmInvest Research - 16 Dec 2020