Investment Highlights

• Maintain our base-case end-2023 FBM KLCI target at 1,515, pegged to an unchanged 2024F P/E of 15x – at its 5-year median albeit at 3 standard deviations below pre-pandemic 2017-2019 median of 17x. Nevertheless, we still expect some upward traction towards the end of the year on ample local liquidity, below-median 2024F 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 19.5% currently and prospects of a stronger ringgit next year.
  
  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.
  
  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.
   
• Foreigners reversed to selling position in October. As the ringgit depreciated by 5.6% MoM against the dollar and 10-year US treasury yields rose 100bps to 4.92% from 1 August 2023, foreigners completely reversed the purchases of RM2.2bil equities over 3 months for the period July-September 2023 in October (Exhibit 6-8). They were net sellers mainly in financial services (64%), consumer products/services (27%) and energy (4%) involving Hong Leong Bank, Maybank, Public Bank, RHB Bank, CIMB, IHH Healthcare, Malaysian Airports, PPB Group and Nestle (Exhibit 2). However, foreigners bought into YTL Corp, YTL Power, Inari Amertron, Sunway, Sime Properties, Boustead Plantation, Gas Malaysia and IJM Corp.
  
  Local institutions reverted to a net buying position, acquiring RM2.4bil of equities last month. This was significantly more than the 3-month local institutional sales of RM1.2bil in July-September 2023. Overall, these higher domestic purchases cushioned foreign sales, leading to a slight FBMKLCI gain of 1.3% MoM in October.
   
• YTD foreign outflows from region. YTD, net foreign selling in Malaysia rose to RM4.2bil (from RM2.0bil in Sep) vs. RM5bil purchased by local institutions. For comparison, foreign net selling was more intense for Thailand at RM22.6bil while the Philippines and Indonesia were comparable to Malaysia. China has experienced net equity outflows from February 2023 to June 2023, leading to a YTD net foreign sale of RM147bil, which accounts for 67% of regional outflow of RM221bil since the beginning of the year. As a comparison, India enjoyed YTD foreign equity inflows of RM56bil while South Korea RM14bil. ASEAN registered YTD2003 net foreign equity outflows of RM36.6bil (vs. RM48bil inflows in 2022) with Malaysia accounting for 11% of YTD ASEAN net foreign equity sales (Exhibit 10).

• Mixed Malaysian equity valuations against the region. The support from domestic institutions partly cushioned the FBMKLCI from the US Federal Reserve’s higher-for-longer interest rate narrative, as the FBMKLCI’s YTD decline of -3.8% appears defensive compared to Thailand’s -17%, Hong Kong’s -14%, Philippines -9% and Singapore’s -5% (Exhibit 4). The rolling forward of FBMKLCI’s 5-year median forward P/E has fallen from 15.1x last month to 15.0x (vs. pre-pandemic 2017- 2019 median of 17x) due to persistently low post-pandemic valuations.
  
  The FBMKLCI’s 2023F PE of 14.5x, which translates to -0.2 SDB5YM, appears pedestrian compared to the region’s substantively below-median valuations such as Vietnam’s -1.8, Hong Kong’s -1.6, Philippines’ -1.4, Singapore’s -1.3 and Indonesia’s -0.8 (Exhibit 17).

• Mild 2024F earnings growth prospects. Our FBMKLCI 2024F earnings growth of +12.5% appears slightly more aggressive than consensus’ +10.4%. However, this still appears mild compared to South Korea’s +54% and Taiwan’s +21%, which are projected to rebound from -23%-32% contractions this year. Except for Singapore’s tepid corporate earnings growth of 3% and Hong Kong’s 10%, the entire region is expected to grow at a faster 2024F pace with Vietnam at 31%, India 18%, Japan/Thailand 16%, China 15% and Indonesia/Philippines 12%.

• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist still holds to an initial baseline “soft-landing” economic scenario in the US, albeit the downside risk appears relatively higher now as a rate cut is unlikely to take place any time before mid-2024. At the very most, we view another 25 bps hike can still be absorbed while anything beyond that could invite greater downside economic risks. Moreover, the lag effects from past tightening measures should continue to surface over the coming months. Hence, we opine that policy tightening thus far is adequate and the Fed should avoid over tightening to engineer a soft-landing scenario for the world’s largest economy.
  
  Recall that the Fed has pushed the Fed Funds Rate (FFR) to 5.25% - 5.50%, reflecting 525 bps hikes since the monetary policy tightening campaign was initiated early last year. Where the USD/MYR is currently trading at, our economist thinks that the ringgit is undervalued and has recently reinforced our 2024F year-end target of 4.50 as USD weakness is expected to re-surface once US economic indicators soften further, paving the way for a back-loaded rate cut.

• 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 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, Sunway REIT and Gamuda (Exhibit 21).

• Technical analysis: FBM KLCI’s near-term trend is likely to remain sideways, given that the index has yet to recover above the immediate 1,465 resistance (the September high). For now, we expect the KLCI to trade in a range between 1,412 and 1,465 as it tries to form a base pattern after the index successfully broke above the 1.5-year downtrend line (derived from the March 2022 highs) a couple of months back. The resistance level is seen at 1,465, followed by the 1,500 psychological marks. Towards the downside, we are eyeing the support at 1,412. If this support is taken out, we expect a deeper pullback towards the next support at 1,370 for the KLCI (Exhibit 1).

Source: AmInvest Research - 2 Nov 2023