Investment Highlights

• No kickoff from year-end asset reallocation. The FBMKLCI ended 2023 lower by 3% YoY to 1,455 as foreigners were net equity sellers of RM2.3bil, partly cushioned by local institutional buying of RM3bil. 45% of the foreign net selling were from the financial sector, 24% in consumer products/services and 13% in industrial products/services.
  
  However, foreigners reverted to a buying position of RM1.6bil equities in November 2023 and continued to nibble at RM257mil in December 2023 as the ringgit gained 1.5% MoM to RM4.59/US$. Expectation of year-end asset reallocation by local institutionals did not materialise in November-December 2023, which instead recorded a combined net sale of RM1.6bil.
  
  In December, foreigners bought into MayBank, CIMB, YTL Corp, Frontken Corporation, Genting, Sime Property, Velesto Energy and Petronas Gas. However, foreigers sold RHB Bank, Nestle, Tenaga, Inari Amertron, UMW Holdings and Bermaz Auto (Exhibit 3).
  
  Meanwhile, local institutions were largely absent in December with a negligible net sale of RM2mil.

• YTD foreign outflows from ASEAN region. In 2023, net foreign selling of RM2.3bil in Malaysia were mild compared to China’s RM147bil and Thailand’s RM25bil. As a comparison, India enjoyed YTD foreign equity inflows of RM125bil while South Korea drew in RM46bil. ASEAN registered YTD2003 net foreign equity outflows of RM37bil (vs. RM48bil inflows in 2022) with Malaysia accounting for 6% of YTD ASEAN net foreign equity sales (Exhibit 12).

• 2024F FBMKLCI core earnings prospects mixed vs. regional economies. Our 2024F FBMKLCI earnings projections of 14.4% is driven largely by oil & gas (20%), plantation (18%), power (17%) and financial services (14%). This is comparable to Bloomberg consensus’ 2024F FBMKLCI index earnings growth of 13.6%.
  
  At this stage, 2024F earnings prospects of other countries in the region have likewise recovered with Indonesia expected to grow by 35%, Thailand 18% and Philippines 16% (Exhibit 18). Vietnam’s index earnings growth is projected to surge by 52% in 2024. Hence, although Malaysia’s 2024F corporate earnings growth outpaces US’ 12% and UK’s -7.6%, the other ASEAN countries’ steeper trajectories are likely to draw higher foreign investor interest.
  
  For 2025F, we are projecting FBMKLCI earnings growth of +7.0% (vs Bloomberg’s +5.8%), anchored by financial services (+25%), oil & gas (18%) and transportation (18%). Even so, we acknowledge that uncertain macro headwinds from global recessionary and inflationary prospects coupled with the timing of the US Federal Reserve’s interest rate pivot this year could lead to significant revisions to corporate earnings prospects.

• Mild Malaysian equity valuations against the region. The support from domestic institutions partly cushioned the FBMKLCI from the US Federal Reserves’ higher-for-longer interest rate sentiments, as the FBMKLCI’s YTD decline of -3% appears defensive compared to Thailand’s -15% and Hong Kong’s -15% (Exhibit 5). However, Vietnam (+12%) and Indonesia (+6%) still performed better than Malaysia. The rolling forward of FBMKLCI’s 5-year median forward P/E was flattish MoM at 14.9x vs. pre-pandemic 2017-2019 median of 17x due to persistently low post-Covid19 valuations. The FBMKLCI’s 2023F PE of 14.6x, which translates to an -0.2 SDB5YM, appears mild compared to the region’s below-median valuations such as Hong Kong’s -1.5, Philippines’ -1.2, Vietnam’s -1.1, Singapore’s -1.0 and Indonesia’s -0.3 (Exhibit 18).

• Maintain base-case end-2024 FBM KLCI target at 1,545, pegged to an unchanged 2024F P/E of 14.9x – at parity to its 5- year median albeit at 3 standard deviations below pre-pandemic 2017-2019 median of 17x. Against the backdrop of belowmedian 2024F P/E valuation of 13.6x, 2024F corporate earnings growth of 14%, highly compelling dividend yields, low foreign shareholding low of 19.6% currently and prospects of a stronger ringgit next year, we expect a better end-2024 FBMKLCI conclusion amid reinvigorated expectations of infrastructural rollouts with a firm government mandate. However, this is tempered by rising probability of a global recession from the aftermath of an extended 500bps US interest rate hike cycle, which will drive volatility across all markets.
  
  The worst-case scenario from a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts translates to an end-2023 FBMKLCI target of 1,315, pegged to 2024F P/E of 12.7x at -1 SDB5YM.
  
  The 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 1,655, pegged to 2024F P/E of 16x at 0.5 standard deviation (SD) above its 5-year median.

• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economists hold to an initial baseline “soft-landing” economic scenario in the US, albeit the downside risk is relatively higher now compared to earlier as a rate cut is unlikely to take place any time before the mid-2024. Moreover, the lag effects from the tightening measures should continue to surface in the coming months.
  
  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 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 (Exhibit 2).

• Sector and stock selection will be key to relative outperformance given rising risks of a US-led global recession for 1H2024 while local consumption spending could be mitigated by subsidy rationalisation plans amid slightly higher inflation. We are OVERWEIGHT on oil & gas, construction, technology, manufacturing, ports, power, property, REIT, glove and transportation sectors with top picks being CIMB, RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, Sunway, Yinson, Pavilion REIT and Mah Sing (Exhibit 23).
  
  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 24).
  
  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 22).

• Technical analysis: Ever since the FBM KLCI broke above the 22-month downtrend line from the March 2022 highs, the index has been rebounding higher and oscillating around its relatively flat 20-day exponential moving average (EMA) for a couple of months. We believe that this sideways movement indicates a base-building period for the index. In the longer term, we expect the KLCI to trend higher. The 20-day and 50-day EMAs confirmed a bullish crossover 2 months ago, suggesting that bullish momentum is picking up. Support levels are seen at 1,412 and 1,370, representing the lowest point in 2023. On the upside, the resistance level is set at 1,465, followed by the psychological mark of 1,500 (Exhibit 1).

Source: AmInvest Research - 3 Jan 2024