Investment Highlights

• Continuing net foreign equity buys. Foreign equity investors, who have been net sellers over the past 4 years, continued to remain net Malaysian buyers last month at RM826mil, albeit at a 75% MoM drop from RM3.3bil in March 2022, which was a 5-year peak since March 2017. In April this year, foreigners were net sellers for 5 trading days compared to only a day in March 2022.
  As a comparison, foreigners were net sellers of RM3.2bil in 2021, RM24.6bil in 2020, RM11.1bil in 2019 and RM11.5bil in 2018 which drove foreign shareholding in Malaysian equities to near its 11-year low of 20.4% currently. 2022 YTD, foreigner equity investors have now switched to net buying positions with a total of RM7.3bil.

• Regional equities generally underperformed vs. Malaysia. Since the beginning of the year, only 2 regional countries have outperformed the FBMKLCI’s gain of 2.1% with Indonesia rising faster by 9.8% and Singapore 7.5%. Thailand was largely unchanged at +0.6% while the rest of emerging markets were in the red. India decreased by 1.4%, the Philippines by 5.5% and Taiwan by a faster pace by 8.9% while rising pandemic-driven lockdowns and tensions with the US/Europe pulled down Hong Kong 9.9% and China 16.3%.

• Still at discount to 5-year PE median. In terms of valuations, the FBMKLCI’s 2022 PE of 15.3x currently implies a significant 6% discount to its 5-year median of 16.4x. In ASEAN, the Philippine index’s MoM drop of 6.5% now translates to a wider 8.8% discount to its 5-year PE median while Indonesia trades at a premium of 14% and Thailand at 7%.
  Outside of the ASEAN region, most of the other regional countries are at discounts to their 5-year PE medians with Korea at 1%, India 3%, Hong Kong 11%, Japan 15%, China 20% and Taiwan 22%. We believe the ongoing lockdowns and protracted trade tensions with US and Europe, particularly following China’s tight-rope balancing stance on the RussiaUkraine crisis and ongoing trade disputes, will continue dissuading foreign equity investors over the coming months.

• Likely near-term range-bound… We still expect a largely range-bound FBMKLCI over the next quarter at 1,500 to 1,600 with ample domestic liquidity partially cushioning any negative earnings revisions amid a potentially slower economic growth outlook dampened by elevated crude oil prices above US$100/barrel, ongoing supply chain disruptions exacerbated by sanctions on Russia and persistent pandemic news flow. Even so, supported by robust oil prices, our in-house base-case views the USD/MYR to strengthen to RM4.15–RM4.20 from RM4.35 currently in anticipation of 1–2 rate hikes in 2H2022. Under this relatively contained currency risk outlook, we expect foreign investors to continue gravitating towards Malaysian equities.

• … with year-end inflection point. Towards the end of the year, we expect a long-awaited semblance of normalcy as the market reaches an inflection point when local institutions reposition on likely window-dressing activities amid clearer visibility to our FBMKLCI 2023F EPS growth recovery of 14.9%. This will be the fastest expansion since 2012, excluding the 2021 sharp rebound of 31% YoY from unprecedented Covid-19 lockdowns.

• Maintain base-case end-2022 FBMKLCI target at 1,745, pegged to its 5-year median of 16.4x, without any discounts, on expectations that ample liquidity and the recent reopening of international borders will support economic recovery in tandem with an in-house GDP growth projection of 5.6%. This 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).

• Worst case at 1,415 and best at 1,820. Our worst-case outlook remains on an FBMKLCI drop to 1,415, pegged to 2022 PE of 14.8x, 1 standard deviation (SD) below its 5-year median, driven by substantive earnings disappointments, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a reversal of foreign net flows. In this scenario, we expect foreign net equity flows to reverse to net sellers as 2022 GDP growth slows to 4.8% from stagflationary 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.

• Maintain OVERWEIGHT on the automobile, banking, media, oil & gas, ports, power and technology sectors with top BUYs being Maybank, Tenaga Nasional, CIMB Group, RHB Bank, MR D.I.Y., Telekom Malaysia, Inari Amertron, Malaysia Pacific Industries, UMW Holdings and Hibiscus Petroleum. Sectors with NEUTRAL rating are gloves, healthcare, insurance, property, REITS, telecommunications, EMS, consumer and construction. For dividend-yielding stocks, our top 5 picks are Malakoff, Astro, Globetronics, YTL REIT and Lagenda Properties.

Source: AmInvest Research - 5 May 2022