Investment Highlights

• Net foreign equity selling easing off. Foreign selling pressure eased off in October with net sales of RM594mil, 63% down from RM1.6bil in September (Exhibit 4-6). Together with local institutional buying, this partly supported a mild 6% rebound from 2-year low of 1,373 on 13 October 2022, a level not seen since May 2020 during the initial outbreak of the Covid-19 pandemic. The selling activities during last month mostly focused on industrial products & services (32%), healthcare (25%), finance (23%) and technology (20%). This is likely to decrease foreign equity shareholdings in October from 20.6% in September this year, which remains substantively below the 22.4% in January 2020 before the Covid 19 global outbreak (Exhibit 2).

• Still among only 3 ASEAN countries with YTD net foreign inflow. The net selling over the past 2 months reduced YTD 2022 foreign net buying position by 27% from RM8.2bil as at 31 August 2022 to RM6.0bil (Exhibit 5), of which 75% was into the financial sector with the balance mostly into plantation and industrial products/services. Within the region, only Indonesia, Thailand and Malaysia enjoyed YTD net foreign equity inflow with Malaysia accounting for a lower share of 12% of ASEAN’s net purchases from 16% in August this year (Exhibit 7-8).

• Partially cushioned by local buying. The weakness on Malaysian equities was partly cushioned by local buying support which reached RM1.9bil in September-October vs net foreign sales of RM2.2bil. While the local institutional net buying activities were a mild relief amid counter-cyclical transactions with foreign investors, local institutions were still YTD net sellers of RM8.2bil (Exhibit 7-8). This was 35% more than cumulative foreign net purchases of RM6bil in 2022 so far, which dampened investor sentiments amid rising concerns of overly aggressive US interest rate hikes and the upcoming GE15 election.

• Malaysian equities at bargain Southeast Asian valuations. YTD, only Indonesia and India bucked the regional downtrend with the Jakarta Composite Index rising by 8% and India 4%. The worst performers were the Far East markets - Hong Kong (- 37%), Taiwan (-29%), Korea (-23%) and China (21%) (Exhibit 3). Hence, the FBMKLCI currently trades at a Southeast Asian bargain at 1.2 standard deviation below its 5-year median (SDB5YM) of 16.3x, vs 0.5 SD SDB5YM for Thailand, 0.8 for Indonesia and 1.0 for Singapore (Exhibits 12 & 14).

• Tapering interest rate expectations next year. Our economist expects Bank Negara to raise the overnight policy rate (OPR) by 25 basis points (bps) this month and a subsequent 25 bps in January 2023 that will bring the OPR to 3.00% for the whole of next year. Given the aggressive stance of the US Federal Reserve, consensus’ expectations of additional rate hikes this year could elevate the Federal funds rate from 3.00%-3.25% currently to 4.50% by end-2022, and taper off to 4.30% next year.

• Net foreign equity outflow is already reversing. We note that net foreign buying resumed with a total of RM312mil last week. Hence, we expect a return of foreign equity buyers soon from the September-October foreign equity outflows amid compelling Malaysian equity valuations and prospects of our inhouse 2023 GDP growth projection of 4.6% vs the global rate of 2.3%. This will be underpinned by expectations of a stronger ringgit with our economist projecting the ringgit/US$ to improve from RM4.73 currently to RM4.70 (consensus: RM4.55) by end-2023, subsequently gain strength further to RM4.40 (consensus: RM4.43) by end-2023.

• Lowered our base-case end-2022 FBMKLCI target at 1,540, pegged to 1.0 SDB5YM against the backdrop of the upcoming GE15 elections with a best-case outlook of 1,630 (former base-case view), premised on 0.5 SDB5YM. Near term, fund flow volatility could continue to drive the index within a wide range of 1,300 to 1,600 as the reopening of international borders and stronger economy may be curtailed by faster-than-expected US rate hikes, stagflationary worries, earnings volatility amid commodity price swings and further supply chain shocks from Russia being shunned by the global economy as well as the upcoming 15th Malaysian general election (GE15) on 19 November.

• Our worst-case outlook has been lowered to an FBMKLCI drop to 1,320, pegged to 2022 PE of 12.9x, 2.5 SDB5YM, potentially driven by domestic political changes, substantive earnings disappointments, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a structural reversal of foreign net flows. We note that the FBMKLCI reached 1,300 during the initial outbreak of the Covid 19 pandemic, which triggered a global GDP recession of 3.1% in 2020.

• OVERWEIGHT on banks, oil & gas, autos, ports, technology, property and media with top picks being Maybank, RHB Bank, CIMB, Yinson, Dialog Group, Bermaz Auto, Inari Amertron, MPI, Sunway and Astro (Exhibit 19). We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum (Exhibit 20). 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 Nov 2022