Investment Highlights

• We have raised our end-2022 base-case FBM KLCI target to 1,745 points (from 1,651 previously), pegged to its 5-year median of 16.4x, without any discount, on expectations that ample liquidity and the reopening of international borders, which support economic recovery and an in-house GDP growth projection of 5.6%, will cushion potential downward earnings revisions amid volatile commodity price swings, further supply chain shocks from Russia being shunned by the global economy and political noises running up to the 15th general election (GE15).
  As a net oil exporter, Malaysia is partially buffered from higher crude oil prices compared to Indonesia and Thailand. While still exposed to imported inflation, driven by commodity prices and supply chain disruptions, we believe Malaysia remains an attractive equity destination vs. the Asean region.

• Worst case at 1,415 points and best at 1,820. Our worst-case outlook envisions the FBM KLCI to drop to 1,415, pegged to 1 standard deviation below its 5-year median, driven by substantive earnings disappointments, fresh Covid-19 variant outbreaks and further geopolitical shocks. In this scenario, we assume that foreign net equity flows will reverse to net sellers as 2022 GDP growth slows to 4.8% from stagflation pressures amid heightened political noises, partly cushioned by local institutional net buying activities. Under a blue-sky scenario with a stronger 2022 GDP growth at 6%, we expect the index to rise to 1,820, pegged to 0.5x SD above its 5-year median.

• Potential 3%-point 2022 EPS decline in worst-case scenario as 67% of the FBM KLCI weightage comprising banks, oil & gas, technology, gaming, healthcare and power sectors are not expected to be significantly impacted by higher operating costs. This sensitivity analysis assume a 10% contraction in earnings for the remaining index constituents from higher raw material costs arising from an elevated inflationary environment amid persistent supply chain disruptions.

• Net foreign buying gathers momentum. Foreign equity investors, which have been net sellers over the past 4 years, have reversed to net buyers with positive YTD net trades of RM6.5bil in Malaysia. In March 2022, net foreign buyers rose 16% MoM to RM3.3bil, a 5-year monthly peak since March 2017.
  After Indonesia, Malaysia is now the Asean country with the second widest earnings multiple discount of 10% currently to its 5-year median. Supported by robust oil prices, our in-house base-case view the USD/MYR appreciating from RM4.21 currently to RM4.15 by the end of the year with a modest 25bps rate hike and modest inflation of 2.8%–3% in 2H2022. Hence, with Russia being shunned by equity investors who are likewise wary of the growing tensions between China and the US/Europe, we expect net foreign equity inflows to continue gravitating to Malaysia.

• Inflection point towards late 2022 earnings cycle. The equity market is likely to be remain range-bound in the near term within a 1,500–1,600 threshold given the volatility in commodity prices, supply chain disruptions and geopolitical shocks. Also, our 2022 FBM KLCI EPS is projected to contract by 5.6%, largely from glove manufacturers, dampened by declining unit prices, supply chain disruptions and labour constraints on manufacturing together with the 33% corporate prosperity tax on income above RM100mil. Hence, local institutional selling have offset foreign equity purchases by RM500mil YTD.
  Towards the end of the year, we expect the market to reach an inflection point as local institutional funds switch to long positions on probable window-dressing activities amid clearer visibility to our FBM KLCI 2023 EPS growth recovery of 14.9%, which will be the fastest expansion since 2012, excluding the 2021 sharp rebound of 31% YoY from Covid- 19 lockdowns.

• We are OVERWEIGHT on the automobile, banking, media, oil & gas, power and technology sectors with top Buys of Maybank, Tenaga Nasional, CIMB, RHB Bank, MR DIY, Telekom Malaysia (TM), Inari Amertron, MPI, UMW Holdings and Hibiscus Petroleum. We are NEUTRAL on gloves, healthcare, insurance, property, REITS, telecommunications, EMS, consumer and construction. As sustainability remains a relevant key institutional investment criteria, our top ESG picks are Yinson Holdings, TM, Maybank and Sunway REIT. The only UNDERWEIGHT sector is plantation as crude palm oil prices are expected to soften after peaking at RM8,000/tonne together with rising 2H2022 production. Top SELLs are Nestle, Tan Chong Motor, FGV Holdings, Pecca and ATA IMS.

Source: AmInvest Research - 4 Apr 2022