Investment Highlights

• Reversal to net foreign equity selling in Sep. Foreign investors reversed to net equity sales of RM1.6bil in September in tandem with the ringgit weakness after a RM2bil buying rebound in August (Exhibit 2). This drove down the FBMKLCI index by 8% MoM to a 2-year low of 1,395 on Friday, which was a level not seen since May 2020 during the initial outbreak of the Covid- 19 pandemic. This is likely to decrease foreign equity shareholdings in September after falling to 20.1% in August 2022 from 20.6% in February this year. This remains substantively below the 22.4% in January 2020 before the Covid 19 global outbreak (Exhibit 6).

• Still among only 3 ASEAN countries with YTD net foreign inflow. The September selling activities caused YTD 2022 foreign net buying position fell to RM6.6bil from RM8.2bil in August. Since the beginning of the year, 58.5% of net foreign purchases was into the financial sector, plantation 24% and industrial products/services 17%, partially offset by RM1.4bil net sale of technology stocks. Within the region, only Indonesia, Thailand and Malaysia enjoyed YTD net foreign equity inflows with Malaysia accounting for 16% of ASEAN’s net purchases (Exhibit 7-8).

• Mostly offset by local institutional sales. The FBMKLCI drop in September could have been worse if not for local institutions buying of RM1.1bil equities in September, partly cushioning foreign investors’ net sales. Amid counter-cyclical transactions with foreign investors, local institutions were still YTD net sellers of RM9.3bil (Exhibit 2-3). This was 39% 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 and looming recessionary headwinds.

• Malaysian equities at even more bargain valuations. In September, every regional stock index declined with the worst being Hong Kong (-14%), followed by Korea and Philippines, both sliding 13%. Regionally, most stock exchanges declined YTD except the Jakarta Composite Index, which rose 7% while Singapore was flat. Korea fell the most YTD by 28%, Hong Kong and Taiwan 26%, Philippines 19% and China 17%. Comparatively, Malaysia weathered the recent sell-down well with a YTD decline of 11% (Exhibit 1).
  Hence, the FBMKLCI now trades at a more attractive bargain -1.7 standard deviation below to its 5-year median (SDB5YM) of 16.3x (vs -1.0 SDB5YM on 30 Aug), comparable to Hong Kong’s SDB5YM of -1.8. Only Taiwan still trades at a much lower -2.3x SDB5YM. For the only other 2 Southeast Asian which enjoyed positive YTD foreign equity inflows, Indonesia currently trades at a stronger SDB5YM of -0.7 and Thailand -0.5x (Exhibits 13). Hence, we believe current levels offer good opportunities to accumulate given that the index did not seriously breach the SDB5YM of -2x even during the 2020-2021 unprecedented Covid-19 pandemic watershed (Exhibit 4) that caused a 2020 GDP recession of 5.5% in Malaysia.

• September foreign equity outflow is unlikely to develop into a longer term trend. Instead, we expect a return of foreign equity buyers in 4Q2022 from September foreign equity outflows amid compelling Malaysian equity valuations and prospects of our inhouse 2022 GDP growth projection of 6.4% vs the global rate of 2.7%. This will be underpinned by expectations of a stronger ringgit with our economist projecting the ringgit/US$ to strengthen from RM4.64 currently to RM4.55-4.60 (consensus: RM4.55) by end-2022, subsequently improving further to RM4.40-4.45 (consensus: RM4.35) by end-2023.

• Maintain base-case end-2022 FBMKLCI target of 1,630 as our 2022 aggregated EPS is unchanged. This target is pegged to 15.7x - 0.5 SD below 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 7.1% (consensus: +11.5%) after the upcoming Budget announcement on 7 October.
  Near term, fund flow volatility could continue to drive the index within a range-band of 1,400 to 1,600 as the stronger domestic economy may be curtailed by overly-aggressive US rate hikes, stagflationary worries, earnings volatility amid 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).

• OVERWEIGHT on banks, oil & gas, autos, technology, ports, property and media with top picks being Maybank, RHB Bank, CIMB, Yinson, Dialog Group, Bermaz Auto, Inari Amertron, MPI, Sunway and Astro (Exhibit 20). We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer, niche transit-oriented developments such as Perak Transit as well as grossly undervalued companies such as Deleum (Exhibit 18). 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 19).

Source: AmInvest Research - 3 Oct 2022