Our More Conservative Outlook Stems From:
I) Persistent hawkish tones from the US Federal Reserve given stubbornly high inflation and tight job prospects could mean that expectations of a policy pivot could be delayed beyond early 2024, leading to continued weakness in the ringgit which has depreciated by 5.6% since the beginning of the year to MYR4.67/US$ currently.
II) Continuing negative interest rate differential between MYR and US will mean that foreign equity inflows may not surface until next year, given the strong 3-year (from June 2021 onwards) correlation of -85% to US$-MYR and 82% for US$-MYR to FBMKLCI (Exhibit 5).
III) Less attractive 2024F Malaysian corporate earnings growth forecast of 7% (vs consensus’ 8.5%) than Indonesia’s 9.7%, Philippines 11.4%, China’s 14.4% and Vietnam’s 24%. While projected to decline by 1.1% this year, even S&P500 2024F earnings growth is expected to rebound by a higher 9.5% in 2024F (Exhibit 19). Hence, we expect foreign investors to be less inclined to gravitate towards Malaysian equity, which could mean the spillover of current under-valuation into early next year.
IV) Political noises from upcoming state elections may persist longer than expected.
The slight 9% upside to our revised FBMKLCI target stems from the likelihood that local institutional window-dressing activities towards the end of the year could provide some uplift given that Malaysia’s equity market remains undervalued, currently trading at 1.2 SDB5YM (Exhibit 17).
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 1,600 (from 1,700 previously), to 2024F P/E of 14.8x at 0.5 SDB5YM.
The worst-case scenario from a global recession, new pandemics and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,230 (from 1,310 earlier), pegged to 2024F P/E of 11.4x at 2 SDB5YM. We do not discount global equity volatility from more US rate hike surprises, bank failures, trade tensions and additional global sanctions on Russia.
Source: AmInvest Research - 4 Jul 2023
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