Investment Highlights

• Ending 2022 on a negative note. The FBMKLCI closed off 2022 on a negative note, sliding 5% YoY to 1,495, 3% below our year-end target of 1,540 as local institutional net sales of RM6.5bil overwhelmed foreign equity purchases of RM4.4bil. Towards the end of the year, foreign institutions reverted to net selling positions, reversing from a peak YTD net purchases of RM8.2bil in August 2022. Foreign equity selling accelerated to RM1.4bil in December 2022 from just a slight RM282mil in the previous month. This was mostly cushioned by net local institutional purchases of RM1.7bil last month.

• Recent selling mostly in financial services. The Dec selling activities mostly focused on financial services (62%) with the balance almost equally in industrial products/services and plantation sectors. This could offset the increase in foreign equity shareholdings from 20.5% in October to November to 20.7%, which remains substantively below the 22.4% in January 2020 before the Covid-19 global outbreak (Exhibit 9).

• Still decent recovery from 2-year lows. Amid the backdrop of a US interest rate tightening cycle and Malaysia’s GE15 as the Russia-Ukraine conflict and China’s zero-Covid policy disrupted global supply chains, FBMKLCI’s year-end closing still represents a decent recovery of 9% from a 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.

• Among ASEAN countries with 2022 net foreign inflows. The foreign net selling in Malaysia over the past 4 months cut YTD 2022 foreign net buying position by 43% from RM8.2bil as at 31 August 2022 to RM4.7bil (Exhibit 10) in Dec 2022. Even so, ASEAN countries (comprising Indonesia, Thailand, Malaysia and Vietnam), attracted YTD net foreign equity inflows with Malaysia accounting for 10% of the region’s net purchases (Exhibits 10-11).

• Malaysian equities at bargain Southeast Asian valuations. India, Singapore and Indonesia bucked the regional YTD downtrend with gains of 4% while Thailand was flat. The worst performers were Vietnam (-33%), Korea (-25%), Taiwan (-22%), Hong Kong (-16%) and China (-15%) vs Malaysia’s -5% (Exhibit 4). Hence, the FBMKLCI still trades at a Southeast Asian bargain at 0.9 SDB5YM of 16.2x, at parity to Indonesia with Philippines at 0.7 SDB5YM and Thailand 0.3 SDB5YM (Exhibit 15).

• Tapering interest rate hike expectations next year. Our economist expects Bank Negara to raise the overnight policy rate (OPR) by 25 basis points (bps) this month that will bring the OPR to 3.00% for the whole of this 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 4.25%-4.50% currently but our economist expects a weakening economy to trigger a policy reversal by 2H2023, which will lead to a tapering to 3.50%-3.75% (vs consensus’ 4.70%) next year.

• Expect changes with a new unity government. Under a new unity government, we expect the tabling of 2023 Budget, which was announced in October last year, to be largely retained. However, changes in administrative processes and approvals may defer government-driven construction projects, which will have to be secured via open tenders. As the new government aims to address inflationary pressures and higher costs of living, we do not discount potential approval delays and revisions to Tenaga’s electricity surcharge for 1H2023 and gas transportation tariffs under the second regulatory period. For consumer sector, new measures could be introduced under the current subsidies provided to essential items such as poultry and livestock. For telecommunication sector, the 5G deployment structure may be reviewed to prevent leakages (Exhibit 1).

• Easing China’s zero-Covid policy. China’s easing of Covid 19 movement restrictions engender improving prospects for regional economic and consumption growth with the alleviation of supply chain disruptions that have disrupted global trade over the past year. This will positively impact most sectors involved in technology, EMS, transportation, plantation, oil & gas, construction, ports, REITS, consumer, local pharmaceuticals and selected property companies with China exposure (Exhibit 2).

• Winners and losers from stronger MYR outlook. The MYR has strengthened by 8% to RM4.40/US$ currently from RM4.75/US$ on 4 Nov following the formation of a unity government, with our economist projecting our currency to improve further to RM3.95-RM4.00/US$ by end-2023. We expect the beneficiaries to be automakers (UMW and Tan Chong), consumer stocks (Leong Hup International and Spritzer) and transport companies (Capital A which will pay lower fuel and interest costs). However, the revenue impact will be negative for glove makers (Top Glove, Hartalega and Kossan) and exporters such as Ancom Nylex, as well as for shipping and oil & gas companies (MISC, Hibiscus Petroleum, Yinson and Bumi Armada) (Exhibit 3).

• Expect net foreign equity outflow to reverse. Underpinned by Malaysia’s stronger currency outlook, we expect a return of foreign equity buyers amid attractive Malaysian equity valuations and our inhouse 2023 GDP growth projection of a robust 4.5% vs the global average of 2.1% and US’ meager 0.3%.

• We maintain base-case end-2023 FBMKLCI target of 1,630, pegged to 0.5 standard deviation below its 5-year median (SDB5YM), which is supported by Malaysia’s relatively stronger economic outlook and our economist’ strengthening MYR expectation to RM3.95-RM4.00 next year. Although Malaysia’s 2023 GDP growth is expected to taper to 4.5% (vs. consensus: 4.0%) from 8.5%-9.00% in 2022, this remains better than recessionary prospects in US and Europe with expectations for a reset in US interest rate hike trajectory in 2H2023.
  Best-case scenario from an abrupt US Federal Reserve policy reversal, complete removal of Covid restrictions in China and better-than-expected global economic growth, would be a 2023 FBMKLCI target of 1,740 at parity to its 5-year median PE of 16.2x.
  The worst-case scenario from a full-blown global recession, new pandemics and worsening geopolitical conflicts translates to 1,380, pegged at 2 SDB5YM. We do not discount global equity volatility from more US rate hike surprises, US-China trade tensions and additional global sanctions on Russia.

• OVERWEIGHT on banks, oil & gas, autos, ports, property, REIT, healthcare and media with top picks being Maybank, RHB Bank, CIMB, Yinson, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT and DuoPharma BioTech (Exhibit 22). 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 23). 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 21).

Source: AmInvest Research - 3 Jan 2023