Investment Highlights

• We upgrade our recommendation for FBM KLCI ETF to BUY from HOLD, and adjust our fair value (FV) up by 4% to RM1.92 (from RM1.84) (Exhibit 1). Our FV is based on our FVs (for stocks under our coverage), consensus FVs (for stocks not under our coverage) and last traded price (for Hap Seng Consolidated, which is not under any coverage). It is at a premium to its NAV of RM1.64 (Exhibit 1).

• In 2020, the ETF reported an investment income of RM248,172 (comprising gross dividend incomes of RM103,877 and net investment gains of RM144,295), which was a turnaround from a negative investment income of RM82,559 in 2019. Having accounted for expenditure and tax, it registered a net income RM211,860, against a turnaround from a negative net income of RM119,480 in 2019 (see Exhibit 2). This reflected an uptrend in the Malaysian equity market in 2020 on recovery optimism during which the FBM KLCI gained 2.4% to 1,627 pts from 1,589 pts, vs. a 6% drop to 1,589 pts from 1,691 pts in 2019.

• 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.

• 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). Nevertheless, 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 investors.

Source: AmInvest Research - 1 Mar 2021