AmInvest Research Reports

Strategy - Bargains emerge from June foreign net equity sale

AmInvest
Publish date: Fri, 01 Jul 2022, 09:55 AM
AmInvest
0 6,343
An official blog in I3investor to publish research reports provided by AmInvest research team.

All materials published here are prepared by AmInvest. For latest offers on AmInvest trading products and news, please refer to: https://www.aminvest.com/eng/Pages/home.aspx

Tel: +603 2036 1800 / +603 2032 2888
Fax: +603 2031 5210
Email: enquiries@aminvest.com

Office Hours
Monday to Thursday: 8:45am – 5:45pm
Friday: 8:45am – 5:00pm
(GMT +08:00 Malaysia)

Investment Highlights

  • RM1.3bil net foreign equity selling in June. After 5 consecutive months of equity inflows, foreign investors have switched to net selling with a cumulative RM1.3bil in June (Exhibit 4), which depressed the FBMKLCI below the 1,500 threshold to 1,444 currently vs. 2021 low of 1,475 during Omicron-dampened December last year. The selling activities last month mostly focused on industrial products & services (28%), transport & logistics (23%), finance (21%) and utilities (14%). This reduced YTD 2022 foreign net buying position by 18% from RM7.4bil as at 31 May 2022 to RM6.1bil (Exhibit 4), of which 48% was in the financial sector while the balance was equally distributed across plantation and industrial products/services. Within the region, only Indonesia, Thailand and Malaysia enjoyed YTD net foreign equity inflow with Malaysia accounting for 17% of ASEAN’s net purchases (Exhibits 9–10).
  • Partly cushioned by mild local buying. The weakness on Malaysian equities stemmed from net equity purchases by local institutions in June reaching only RM659mil, half of foreign investors’ net sales and partly cushioning the FBMKLCI decline. While the local institutional net buying activities were a mild relief amid counter-cyclical transactions by foreign investors, local institutions were still YTD net sellers of RM7.9bil (Exhibits 7–8). This was 30% more than cumulative foreign net purchases in 2022 so far, which dampened investor sentiments amid rising concerns of overly aggressive US interest rate hikes.
  • Bargain value emerges for Malaysian equities. Within the region, Indonesia’s stock market bucked the trend with the Jakarta Composite Index rising 5% YTD vs. regional declines as Taiwan slid 19%, the Philippines 14%, India 9%, Malaysia/Japan 8%, China/HK 7% and Thailand 5% (Exhibit 5). Hence the FBMKLCI currently trades at a bargain 1.4 standard deviation (SD) below or 14% discount to its 5-year median of 16.4x. As a comparison, Thailand is currently at 0.2 SD below its 5-year median, HK 0.3 SD, China 0.4 SD, Indonesia 0.6 SD, India 0.8 SD, Japan 0.9 SD and the Philippines 1 SD. Only Taiwan currently trades at a higher discount of 31% or 2.1 SDs (Exhibits 15–17).
  • Higher OPR expectations. Our economist expects Bank Negara to raise the overnight policy rate (OPR) by 50 basis points (bps) this month and a subsequent 25bps in September 2022 that will bring the OPR to 2.75% by the end of this year. Given the aggressive stance of the US Federal Reserve, consensus’ expectations of 6–7 additional rate hikes this year could elevate the Federal funds rates to 3.50% by end-2022, potentially leading to a premium of 75bps against the Malaysian OPR. Nevertheless, the differential between the US federal funds rate and Malaysian OPR has had a low coefficient of correlation of 13% to the USD/MYR rate since July 2005 with the removal of the RM3.80/USD peg. While the US fed rate was at a premium to the OPR from July 2005 to Nov 2007, reaching a high of 190bps in February 2007, the MYR was trading at the RM3.50 level (Exhibits 1–2). Starting from 2008, the FBMKLCI also has had a low correlation of -22% to the US fed rate-OPR differential.
  • We expect a return of foreign equity buyers in 2H2022, notwithstanding the June foreign equity outflows, amid emerging bargain valuations and prospects of a stronger 2022 GDP growth of 5.6% vs. the global rate of 3.6%. This will be further underpinned by expectations of a stronger 2H2022 MYR with our inhouse economist projecting the USD/MYR to strengthen from RM4.40 currently to RM4.20–RM4.25 (consensus: RM4.30) by 4Q2022, subsequently improving further to RM4.10– RM4.15 (consensus: RM4.18) in 2023.
  • Maintain base-case end-2022 FBMKLCI target at 1,745, pegged to its 5-year median at 16.4x as both foreign and local investors are likely to switch back to buying positions towards the end of the year amid clearer visibility to 2023F EPS growth expectations of 8%. Near term, the fund flow volatility could continue to drive the index within a range band of 1,400 to 1,600 as the recent reopening of international borders and stronger economy may be curtailed by higher-than-expected US rate hikes, stagflationary worries, earnings volatility amid commodity price swings, further supply chain shocks from Russia being shunned by the global economy, GST reintroduction and political noises running up to the 15th general election (GE15).
  • Our worst-case outlook remains on an FBMKLCI drop to 1,415, pegged to 2022 PE of 14.8x, 2 SDs 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. We maintain a blue-sky FBMKLCI index scenario at 1,820 pegged to 0.5x SD above its 5- year median based on a stronger 2022 GDP growth at 6%.
  • 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, Berjaya Food, Telekom Malaysia, Inari Amertron, Malaysia Pacific Industries, Bermaz Auto and Dialog Group (Exhibits 17–20). For dividend stocks, our top 5 picks with yields of over 6% are Malakoff, Astro, Globetronics, Maybank and YTL REIT (Exhibit 21).


 

Source: AmInvest Research - 1 Jul 2022

Discussions
Be the first to like this. Showing 0 of 0 comments

Post a Comment