Investment Highlights

• We lowered our base-case end-2023 FBMKLCI target from 1,570 to 1,515, pegged to a slightly lower 2024F P/E of 15x – marginally lower than a rolled-forward 5-year median of 15.1x albeit at 3 standard deviation below pre-pandemic 2017-2019 median of 17x. This stems from our banking sector’s rating downgrade to Neutral from Overweight yesterday due to more conservative prospects for non-interest rate income and net interest margin coupled with the industry’s prudent provisioning stance against the backdrop of a higher-for-longer US interest rate outlook. This will be a substantive drag on the market given that banks account for FBMKLCI’s largest index weightage at 35%.
  Nevertheless, we still expect some upward traction towards the end of the year on ample local liquidity, below-median P/E valuation of 14x, highly compelling dividend yields and year-end window dressing activities against the backdrop of improving corporate earnings growth for next year, moderating political noises, 16-year foreign shareholding low of 19.9% currently and prospects of a normalising ringgit.
  A 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 1,635, pegged to 2024F P/E of 16.2x at 0.5 standard deviation (SD) above its 5-year median.
  The worst-case scenario from a global recession, new pandemic-driven lockdowns and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,294, pegged to 2024F P/E of 12.8x at 1 standard deviation below its 5-year median (SDB5YM). We do not discount global equity volatility from more US rate hike surprises, bank failures and fresh geopolitical/trade tensions.

• Foreign buying improved in September. Even though the ringgit continued to depreciate by 1.2% MoM against the dollar, foreign buying activities improved, albeit to a still-mild RM674mil in September from RM141mil in August (Exhibit 8-10). Foreigners were buying into utilities (48%), construction (11%) and energy (10%), which included YTL Power, Tenaga, CIMB, Petronas Dagangan and YTL Corp. However, foreigners were net sellers of financial services (48%), healthcare (20%), industrial products/services (16%) and REITs (9%) involving RHB Bank, Nestle, Petronas Chemicals, MyEg and MayBank (Exhibit 2).
  Local institutions reverted to a net selling position, disposing RM577mil of domestic equities in September. Overall, the tepid net trading volumes translated to a 1.9% MoM decline for the FBMKLCI.

• YTD foreign outflows from ASEAN region. YTD, net foreign selling in Malaysia declined to a slight RM2.0bil (from RM2.6bil in Aug) vs. RM2.6bil purchased by local institutions. For comparison, foreign net selling was more intense for Thailand at RM20.5bil while the Philippines was RM3.4bil and Indonesia RM1.7bil. China has experienced net equity outflows from February 2023 to June 2023, leading to a YTD net foreign sale of RM147bil, which accounts for 78% of the regional outflow of RM190bil since the beginning of the year. As a comparison, India enjoyed YTD foreign equity inflows of RM70bil while South Korea RM26bil. ASEAN registered YTD2003 net foreign equity outflows of RM29bil (vs. RM48bil inflows in 2022) with Malaysia accounting for 7% of YTD ASEAN net foreign equity sales (Exhibit 12).

• Malaysian equity valuation now appears mixed against the region. The low trading volume led to the FBMKLCI underperforming against the region, being the third worst YTD regional performer at -4.8% after Thailand’s -11.8% and Hong Kong’s -10% (Exhibit 6). The rolling forward of FBMKLCI’s 5-year median forward P/E has fallen from 15.2x last month to 15.1x (vs. pre-pandemic 2017-2019 median of 17x) due to persistently low post-Covid19 valuations.
  The FBMKLCI’s 1-year forward PE of 14.3x has stabilised MOM, translating to an unchanged -0.3 SDB5YM, which now appears mixed given the region’s below-median valuations such as Vietnam’s -1.5, Philippines’ -1.3, Singapore’s -1.1 and Indonesia’s -0.6 (Exhibit 17).

• Mild 2024F earnings growth prospects. Following the recent round of earnings revisions, our FBMKLCI 2024F earnings growth of +11.3% appears slightly more aggressive than consensus’ +10.3%. However, this appears mild compared to South Korea’s +55% and Taiwan’s +24%, which are projected to rebound from -26%-34% contractions this year. Except for Singapore’s tepid corporate earnings growth of 2.6% and Hong Kong’s 9.6%, the entire region is expected to grow at a faster 2024F pace with Vietnam at 31%, India 20%, Japan 16%, China/Thailand 15%-16% and Indonesia/Philippines 12%-13%.

• Clouded trajectory for net foreign equity flows. The expectation for the tail end of the US Fed rate hike cycle now appears to be more prolonged given that inflation remains the top priority which means that high interest rates could continue to constrain the ringgit normalisation process and spur erratic foreign equity flows. Nevertheless, we expect this to be cushioned by Malaysia’s firmer 2024F GDP forecast of 4%-5% vs. US’ 0.9% while our in-house economist expects the ringgit to strengthen to RM4.50/US$ by end-2023F and RM4.25/US$ by end-2024F. With a soft landing expected for the US economy in 2024F, we continue advocating investors to accumulate on weakness in anticipation of a stronger domestic stock market towards the end of the year, underpinned by ample local liquidity, year-end window dressing activities, moderating political noises, all-time low in foreign shareholding, high dividend yields and stronger corporate earnings outlook.

• OVERWEIGHT on oil & gas, autos, consumer, power, property and REIT sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Dialog Group, Gamuda, Yinson and Pavilion REIT (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).
  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: FBM KLCI posted a long black candle in the final session of Sep23, which saw the index break down from a 2-month consolidation rectangle formation. This breakdown possibly indicates that profit-taking activities are present and lower prices may follow next. As its 20-day exponential moving average (EMA) and 50-day EMA are converging now and are likely to turn flat in the coming sessions, we believe that it is likely to be a period of consolidation for the KLCI in the near term. Support level is seen at 1,400, followed by 1,370. Towards the upside, we anticipate resistance level at 1,465, followed by 1,500 (Exhibit 1).

Source: AmInvest Research - 3 Oct 2023