AmInvest Research Reports

Strategy - Trailing the region as valuation gap widens

Publish date: Thu, 02 Feb 2023, 09:28 AM
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Investment Highlights

  • Mild MoM decline. The FBMKLCI started off the year with a 0.7% MoM decline in January to 1,485 points, continuing with the 2022 decrease of 5% YoY. Local institutional and foreign investors were net sellers of RM754mil shares last month, with locals accounting for 54% of net sales amid growing concerns of global recessionary pressures as the US Federal Reserve raised its benchmark federal-funds rate by 25 basis points to 4.5%-4.75% last night.
  • Mixed foreign flows to ASEAN region. While Malaysia experienced mild foreign selling of RM348mil in January, foreigners bought into Taiwan, South Korea, Thailand, Philippines and Vietnam. Taiwan accounted for 55% of January foreign buying, followed by South Korea at 39% and Thailand 4% (Exhibits 10-11). Foreign selling were largely focused on India, which accounted for 93% of net sales with the balance in Indonesia and Malaysia. All in, foreign flows were mildly positive to ASEAN region.
  • Malaysian equity valuation gap widens. The foreign selling contributed to India’s Nifty index sliding by 2% MoM and Indonesia’s flattish performance. The best MoM performers were Hong Kong/Vietnam (+10%), Korea/Taiwan (+8%), China/Japan (+5%) and Singapore/Philippines (+4%) vs Malaysia’s -0.7% (Exhibit 4). Hence, the FBMKLCI decline has led to a widening valuation gap, trading at 1-year forward PE of 13.1x currently. This translates to 1.7 standard deviation below its 5- year median (SDB5YM) of 16.1x, at parity to Indonesia with Philippines at 0.7 SDB5YM and Thailand 0.3 SDB5YM (Exhibit 15).
  • Tapering interest rate hike expectations. Notwithstanding Bank Negara’s surprising decision to keep the overnight policy rate (OPR) unchanged on 19 January, our economist still expects Bank Negara to raise the overnight policy rate (OPR) by 25 basis points (bps) in 1H2023 that will bring the OPR to 3.00% for the whole of this year. The benchmark US federal funds rate was raised by 25 basis points last night, in line with market expectations of a tapering rate hike cycle. Consensus’ expectations of additional rate hikes this year could elevate the Federal funds rate from 4.25%-4.50% currently while 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.
  • Potential changes from unity government. For the 2023 Budget, which will be re-tabled on 24 February, we expect some possible changes from the version announced in October last year, with a focus on relieving cost of living concerns of the B20 and M40 population segment. Even so, we believe changes in administrative processes and approvals may defer governmentdriven 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).
  • Reopening of China’s economy. China’s relaxation of Covid 19 movement restrictions engender improving prospects for regional economic growth against the backdrop of pent-up consumer spending in a country with high savings rates. This will relieve supply chain disruptions that have disrupted global trade over the past year, potentially mitigating recessionary prospects in gas-constrained Europe. All in, we expect this to 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).
  • Net beneficiary from firmer MYR outlook. The MYR has strengthened by 12% to RM4.23/US$ currently from RM4.75/US$ on 4 Nov following the formation of a unity government, with our economist projecting our currency to stabilise at the current levels of RM4.20-RM4.30/US$ by end-2023. Overall, this will be a net positive to Malaysian equities, with beneficiaries being 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 in 2H2023. We acknowledge the US Fed rate hike cyle, while tapering at this juncture, will continue to spur volatility in the global markets over the next few months. However, underpinned by Malaysia’s firm currency outlook, we expect a return of foreign equity buyers in 2H2023 amid attractive Malaysian equity valuations and our inhouse 2023 GDP growth projection of a relatively robust domestic consumption-driven 4.5% vs consensus’ 2.1% for global average and meager 0.5% for US.
  • 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’ stabilising MYR expectation at RM4.20-RM4.30 by December this 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 and better-than-expected global economic growth would underpin 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 RHB Bank, CIMB, Bank Islam, Tenaga Nasional, 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 - 2 Feb 2023

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