Investment Highlights

• April foreign selling slowed down. Amid tapering concerns of another global financial crisis triggered by sharp US Federal Reserve interest rate hikes, net foreign outflows dropped 81% MoM from RM1.3bil in March to RM251mil in April, which was largely offset by local institutions’ net buying of RM213mil (Exhibit 6-8). Most of the April foreign net selling pressure was in banks with the rest in technology, healthcare and REITS, involving CIMB Bank, RHB Bank, Public Bank, Tenaga, Top Glove and Inari Amertron. However, foreigners were net buyers in Maybank, Hibiscus Petroleum, Malaysia Airports and Genting Malaysia (Exhibits 2-3).

• Still YTD foreign outflows from ASEAN region. In Jan-April this year, Malaysia experienced mild foreign selling of RM2.1bil vs Thailand’s RM8.3bil and India’s RM5.5bil. China enjoyed the bulk of YTD net foreign inflows, reaching RM200bil compared with South Korea’s RM26bil and Taiwan’s RM22bil. In Southeast Asia, only Indonesia registered significant net foreign inflows of RM5.6bil while Vietnam was flattish at RM0.5bil. YTD2003, ASEAN registered foreign equity outflows of RM6.5bil vs RM48bil inflows in 2022. Excluding Indonesia and Vietnam, Malaysia accounted for 17% of YTD ASEAN 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 slightly by 2% to 1,426 currently. YTD, Malaysia suffered the second worst regional drop of 5% vs. Thailand’s -8% while Philippines reversed to positive 2% gains and Indonesia was flat (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 0.8, and Thailand’s 0.5 (Exhibit 15).

• No recurrence of the 2008 global credit crunch for base-case view. We reiterate that our economist does not see the present Western banking problems to be similar to 2008 with key differences being 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% in March this year without signalling a pivot from the current semi-hawkish stance. Recall that Global Financial Crisis caused the Dow Jones Index plunge 41% YoY by the end of 2008.

• Expect net foreign equity outflow to reverse in 2H2023. We acknowledge that the US Fed rate hike cycle with strongerthan-expected economic news flow could continue to spur volatility in global markets over the next few months. 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 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 2024 P/E of 15.4x- 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 MYR expectation of a stronger 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 8.7% in 2022, this remains better than recessionary prospects in 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 Gamuda (Exhibit 21).

• Technical analysis: We view the recent rebound on the FBM KLCI, which sent the index above the downtrend line derived from the Jan high, as a possible signal that the longer-term trend may be turning positive. Nevertheless, its 20-day and 50- day exponential moving averages (EMA) are still moving flat, indicating an ongoing sideways trend. Hence, we believe that it is likely to be a period of consolidation for KLCI in the near term. The resistance level is anticipated at 1,440, followed by 1,460. Support is now set at 1,390 and 1,372, which is the lowest point in 2022. We would only turn bullish for the longerterm when the index manages to close above the said 1,460 resistances as well as its daily EMAs (Exhibit 1).

Source: AmInvest Research - 3 May 2023