Investment Highlights

• Slight reversal to net foreign equity buying in July. Foreign investors have reversed to a slight net equity buying position of RM175mil in July after a net selling of RM1.3bil in June (Exhibit 2). This supported a mild 6% rebound from a 2-year low of 1,411 on 13 July 2022, a level not seen since May 2020 during the initial outbreak of the Covid-19 pandemic. Although this increased foreign equity shareholdings in Malaysia to 20.6% in June 2022 from 20.1% in February this year, this remains substantively below the 22.4% in January 2020 before the Covid 19 global outbreak (Exhibit 4) .

• YTD still below May peak. YTD 2022 foreign net buying position of RM6.3bil remains below the peak of RM7.4bil as at 31 May 2022, albeit slightly higher from the RM6.1bil on 30 June 2022. Since the beginning of the year, 48% of net foreign purchases was in the financial sector while most of the balance was equally into 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 7 & 8).

• Partly offset by local institutional sales. The mild recovery on Malaysian equities was stifled by net equity sales by local institutions in July reaching RM41mil and 23% of foreign investors’ net purchases, which partly suppressed the FBMKLCI uplift. Amid counter-cyclical transactions with foreign investors, local institutions were YTD net sellers of RM7.9bil (Exhibits 5 & 6). This was 25% more than cumulative foreign net purchases in 2022 so far, which continues to dampen investor sentiments amid rising concerns of overly aggressive US interest rate hikes.

• Malaysian equities still at bargain valuations. Regionally, most stock exchanges declined YTD except the Jakarta Composite Index, which rose 5.6%, and Singapore up slightly by 2.8%. Taiwan fell the most YTD by 18%, Hong Kong 14%, the Philippines/China 11% and Thailand/Malaysia 5% (Exhibit 3). Following the declines, the FBMKLCI currently trades at a bargain 1.3 standard deviations (SD) below or 13% discount to its 5-year median of 16.3x.
  While an improvement from the FBMKLCI’s YTD low of -1.7 SD on 13 July this year, we believe current levels offer good opportunities to accumulate given that the index did not seriously breach the 2-SD threshold below the 5-year median even during the 2020–2021 unprecedented Covid-19 pandemic watershed (Exhibit 1) that caused a 2020 GDP recession of 5.5% in Malaysia.
  As a comparison, Hong Kong is currently at 1 SD below its 5-year median, Philippines 0.8 SD, Singapore 0.7 SD, China 0.6 SD, Korea 0.4 SD, Indonesia 0.3 SD, Thailand 0.2 SD and India 0.1 SD. Only Taiwan currently trades at a higher discount of 31% or 2.1 SD (Exhibits 13 & 14).

• Expect the return of foreign equity buyers to gather momentum in 2H2022 from the minor July foreign equity inflows amid compelling valuations and prospects of a stronger 2022 GDP growth of 5.6% vs. the global rate of 2.7%. This will be further underpinned by expectations of a stronger 2H2022 ringgit with our inhouse economist projecting the USD/MYR to strengthen from RM4.45 currently to RM4.25–RM4.30 (consensus: RM4.35) by 4Q2022, subsequently improving further to RM4.10– RM4.15 (consensus: RM4.15) by the end of 2023.

• Maintain base-case end-2022 FBMKLCI target at 1,630, pegged to 0.5 SD to its 5-year median at 16.3x as both foreign and local investors are likely to switch back into 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 2022 year-end outlook remains on an FBMKLCI drop to 1,415, pegged to 2022 PE of 14.8x, 2 SD below its 5-year median, driven by substantive earnings disappointments, intensified global recessionary momentum, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a reversal of foreign net flows.

• Reiterate 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 15 & 19). For dividend stocks, our top 5 picks with yields of over 6% are Malakoff, Astro, Globetronics, Maybank and YTL REIT (Exhibit 17). Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Yinson Holdings, Sunway REIT and Astro (Exhibit 18).

Source: AmInvest Research - 1 Aug 2022