Investment Highlights

• We lower our base-case end-2023 FBMKLCI target to 1,500 (from 1,570 previously) with the rolling forward of the 5-year median P/E which has fallen to 15.9x from 16.4x in the previous year given low post-pandemic market valuations. Our KLCI target is still pegged to an unchanged 2024F P/E of 13.9x - 1 standard deviation below the revised 5-year median (SDB5YM).

• 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.

• June foreign selling has rebounded on widening negative carry. With US interest rate trajectory still trending upwards, the US-Malaysia negative 3M interest rate carry has widened by 108 basis point to -1.80% since the beginning of this year (Exhibit 5). Hence, net foreign outflows surged 85% MoM to RM1.3bil in June, which was partly offset by local institutions’ RM1bil net buying (Exhibit 8-10). In 1H2023, net foreign selling reached RM4.2bil vs. RM3.7bil local institutional net purchases. 31% of the June foreign net selling pressure was in banks, 22% industrial products/services, 20% consumers, 11% energy, 10% plantation and 9% telcos involving Public Bank, CIMB, Hong Leong Bank, RHB Bank, Petronas Chemicals, Tenaga, Axiata and Bumi Armada. However, foreigners were net buyers in Maybank, Gamuda, YTL Corp, West Ports, Malaysia Airport and YTL Power (Exhibit 3).

• YTD foreign outflows from ASEAN region. In 1H2023, Malaysia experienced foreign selling of RM4.2bil vs Thailand’s RM13.9bil and Philippines’ RM2.1bil. China received 60% of net foreign inflows, reaching RM200bil compared with Taiwan’s RM49bil and South Korea’s RM34bil. In Southeast Asia, only Indonesia registered significant net foreign inflows of RM4.8bil. ASEAN registered YTD2003 net foreign equity outflows of RM15.6bil vs RM48bil inflows in 2022. Excluding Indonesia, Malaysia accounted for 21% of YTD ASEAN net foreign equity sales (Exhibits 12-13).

• Depressed regional equity valuations. Net foreign selling pressure drove down Malaysia’s stock index from 1,500 on 20 Jan to the YTD trough of 1,375 on 8 June. YTD, the FBMKLCI drop of 7% was wider than Hong Kong’s -3.1%, Indonesia’s -2.8%, Singapore’s -1.5% and Philippines’ -1.2%. Within the region, only Thailand fared worse with a drop of 9.9% (Exhibit 6). Even so, FBMKLCI’s valuation gap may not be too compelling, trading at 1-year consensus’ forward PE of 13.2x currently – which translates to a SDB5YM of 1.2 vs. 1.3 for Hong Kong/Philippines, 1.5 for Vietnam, 1.1 for Singapore and 0.8 for Indonesia (Exhibit 17).

• Navigating global volatility over the coming months. While our economist projects a stronger Malaysian ringgit of RM4.40/US$ (vs consensus’ RM4.50/US$) by the end of this year, we do not discount that the US Fed rate hike cycle could be extended on hawkish economic news flow, spurring further volatility in global markets over the near-term. For US, we note that 2024F market estimate for corporate earnings growth of 9.5% is much higher than the country’s GDP growth expectations of 0.7% for consensus and 1.2% for AmBank.
  
  Given the softening prospects for global economic growth, we expect to navigate negative US corporate earnings news flow over the next 2 quarters, which could radically cut consensus estimates.
   
• OVERWEIGHT on 11 sectors including banks, oil & gas, autos, construction, consumer, manufacturing, power, property, REIT, and healthcare sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT, and DuoPharma BioTech (Exhibit 24). 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 25).
  
  We have 5 sectors which are Neutral – insurance, media, plantation, technology and telecommunications while the glove segment remains UNDERWEIGHT due to over-optimistic valuations ahead of a probable recovery in sales volume and product prices.
  
  Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Sunway REIT and Gamuda (Exhibit 23).
   
• Technical analysis: The FBM KLCI’s technical rebound (from the 8 Jun low) is likely to pause, given that the index has yet to crack above the 1,400 psychological mark and its 50-day exponential moving average (EMA). KLCI is still holding below the downtrend line derived from the Jan high, indicating that the bearish sentiment is intact. For the coming sessions, we expect the index to trade in a range between 1,370 and 1,400 as it tries to form a base following the recent pullback. We now anticipate the immediate support level at 1,370. If price breaks down, we expect the longer-term downtrend to resume for the KLCI and the next support is situated at the 1,300-round figure. Towards the upside, the resistance level is seen at 1,400, followed by 1,440 (Exhibit 1).

Source: AmInvest Research - 4 Jul 2023