Investment Highlights

• Foreign selling accelerated. Against the backdrop of worries of a global liquidity squeeze triggered by mid-tier US bank failures such Silicon Valley Bank and First Republic Bank coupled with Credit Suisse-driven confusion over Additional Tier-1 bond ranking for financial institutions, net foreign outflows accelerated MoM to RM1.3bil in March from RM168mil in February while local institutions reversed to net buying of RM1.2bil (Exhibit 6-8). 62% of the March foreign net selling were in banks, 15% in industrial products/services and 13% in telcos, involving Public Bank, MayBank, RHB Bank, CIMB, Hong Leong Bank, Petronas Chemicals, Tenaga Nasional, TM and Axiata. However, foreigners were net buyers in Gamuda, Carlsberg, Sunway and Malaysia Airports (Exhibits 2-3).

• YTD foreign outflows from ASEAN region. In Jan-March this year, Malaysia experienced mild foreign selling of RM1.9bil vs Thailand’s RM7.3bil and Philippines’ RM2.3bil. However, Indonesia continued to enjoy a YTD reversal with foreigners buying RM1.9bil in March, up RM1.6bil in Feb vs net sales of RM911mil in Jan. Excluding Indonesia and Vietnam in ASEAN, Malaysia accounted for 17% of YTD net foreign equity sales (Exhibits 10-11).

• Malaysian equity valuation gap remains wide. The net foreign selling pressure drove down Malaysia’s stock index from 1,500 on 20 Jan to the YTD trough of 1,392 on 16 March before recovering by 3% to 1,433 currently. YTD, Malaysia suffered the worst regional drop of 4.2%, followed closely by Thailand (-4.1%) and India (-3.9%) (Exhibit 4). Hence, FBMKLCI’s valuation gap remains wide, trading at 1-year forward PE of 13x currently – which translates to 1.6 standard deviation below its 5-year median (SDB5YM) of 16.5x, vs. Philippines’ 1.3, Indonesia’s 0.7 and Thailand’s 0.4 (Exhibit 15).

• Base-case scenario does not envisage a recurrence of the 2008 global credit crunch at this juncture. Recall that Global Financial Crisis caused the Dow Jones Index plunge 41% YoY by the end of 2008. Our economist does not see the present banking problems to be similar to 2008 with key differences being in the stubbornly high inflation rate and overheating job market. This is supported by the US Federal Reserve raising its benchmark interest rates by 25bps to 4.75%-5% a fortnight ago without signalling a pivot from the current semi-hawkish stance.

• Expect net foreign equity outflow to reverse in 2H2023. We acknowledge the US Fed rate hike cycle with stronger-thanexpected economic news flow will continue to spur volatility in global markets over the next few months together with OPEC+ surprise production cut of 1.2mil barrels/day. However, underpinned by Malaysia’s firmer currency outlook, we expect a return of foreign equity buyers in 2H2023 amid attractive Malaysian equity valuations and our inhouse 2023F GDP growth of a relatively robust domestic consumption-driven 4.5% vs consensus’ 2.4% for global average and 1% for US. Hence, we continue advocating investors to accumulate on weakness amid 1H2023 volatility in anticipation of a stronger stock performance towards the end of the year.

• We maintain base-case end-2023 FBMKLCI target of 1,630, pegged to 1 standard deviation below its 5-year median of 16.5x, which is supported by Malaysia’s relatively stronger economic outlook and our economist’s improving MYR expectation to 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 amid expectations for a reset in US interest rate hike trajectory by end-2023 or early 2024. Best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,740, at 0.5 SDB5YM PE. The worst-case scenario from a full-blown global recession, new pandemics and worsening geopolitical conflicts translates to 1,380, pegged at 2 SDB5YM PE. We do not discount global equity volatility from more US rate hike surprises, bank failures, trade tensions and additional global sanctions on Russia.

• OVERWEIGHT on banks, oil & gas, autos, ports, property, REIT, healthcare and consumer sectors with top picks being RHB Bank, CIMB, Alliance Bank, 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).
• Technical analysis: FBM KLCI broke out from its 2-week triangle pattern with a long white candle a few sessions ago, implying that a bullish reversal sign may have occurred. Coupled with the index recovering above its 20-day exponential moving average (EMA), this likely indicates the return of buying interest. In addition, it would be more promising if a decisive breakout above the downtrend line derived from the Jan high can be seen in the coming sessions. KLCI may potentially push higher from here in the near term, with support set at 1,390 and 1,372, which is the lowest point in 2022. Towards the upside, we now anticipate immediate resistance level at 1,433, i.e. the downside gap resistance created on 13 Mar. The next resistance is seen at 1,460, followed by the 1,500 psychological mark. Overall, a decisive breakout above the downtrend line is positive for KLCI in the near term (Exhibit 1).

Source: AmInvest Research - 4 Apr 2023