Investment Highlights

• Foreign buying gains momentum with local support. Even though the ringgit depreciated 2.9% in January, the FBMKLCI rose 4% to 1,517 as foreign buying gained momentum, surging 2.7x MoM to RM679mil into the financial (33%), construction (+28%) and property (22%) sectors with the balance into energy, healthcare, telco and plantation. This was slightly offset by foreigners were selling out of the consumer and industrial products/services sectors.
  
  In January, foreigners bought into YTL Power International, Maybank, Sime Darby, IJM Corp, Gamuda, Public Bank, S P Setia, MRCB, TM and YTL. However, foreigners sold Malaysia Airports, Press Metal, UMW, RHB Bank, Sunway, Nestle, Inari, Dialog and Tenaga Auto (Exhibit 3). In addition to the foreign buying activities, the local bourse was further supported by local institutional buying of RM113mil.

• Slight foreign outflows from ASEAN region. In January, ASEAN region experienced a slight net foreign equity outflow of RM310mil due to Thailand, which saw foreigners selling down RM4.1bil. However, Indonesia managed to draw in RM2.5bil (3.7x Malaysia) and Philippines RM378mil.
  
  Foreigners continued to buy RM11.5bil in South Korea’s equities in January, continuing from RM46bil net inflows in 2023, which boosted the Korea Composite Index by 19% last year. However, India, which enjoyed 2023 foreign equity inflows of RM125bil, experienced net sales of RM14.9bil (Exhibit 11).

• 2024F FBMKLCI core earnings prospects mixed vs. regional economies. Our 2024F FBMKLCI earnings projections of 14.7% is driven largely by oil & gas (20%), plantation (18%), power (17%) and financial services (14%). Meanwhile, 2024F earnings prospects of other countries in the region have likewise recovered with Indonesia expected to grow by 34%, Thailand 17% and Philippines 16% (Exhibit 18). Vietnam’s index earnings growth is projected to surge by 49% in 2024. Hence, although Malaysia’s 2024F corporate earnings growth outpaces US’ 12% and UK’s flattish -0.7%, the other ASEAN countries’ steeper trajectories are likely to draw higher foreign investor interest.
  
  For 2025F, we are projecting FBMKLCI earnings growth of +7.2% (vs Bloomberg’s +6.0%), 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. With the support from foreign and domestic institutions, the FBMKLCI’s YTD rise of 4.4% appears optimistic compared to the negative performances of regional markets such as China’s -6.8%, Thailand’s -3.4%, Korea’s -2.1%, Indonesia’s -1.0% and Singapore’s -1.7% (Exhibit 5). Amongst positive bourses, Malaysia outperformed Philippines’ 4.3%, Vietnam’s 4.1% and US’ 2.9%.
  
  The rolling forward of FBMKLCI’s 5-year median forward P/E slid MoM to 14.8x (from 14.9x last month) vs. pre-pandemic 2017-2019 median of 17x due to persistently low post-Covid19 valuations. The FBMKLCI’s 2024F PE of 14x translates to a -0.6 standard deviation below the latest 5-year median (SDB5YM), yet appears mild compared to the region’s below-median valuations such as Hong Kong’s -2.2, China/Vietnam’s 1.8, Philippines’ -1.3, Singapore’s -1.1, Thailand’s -0.8 and Indonesia’s -0.7 (Exhibit 16).

• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economists hold to a baseline “softlanding” economic scenario for the US with Fed rate cuts of 75-100 basis points in 2H2024. However, US Federal Funds futures contracts are currently priced on the expectation of 6-7 US Federal Rate cuts this year, with another in early 2025. This appears optimistic given the current consensus expectation of US inflation rate of 2.7% is well above the Federal Reserve’s target of 2%.
  
  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 2022. 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).  
   
• Maintain base-case end-2024 FBM KLCI target at 1,545, pegged to a 2024F P/E of 14.5x – slightly below its 5-year median, which is likely to decline given low post-pandemic valuations. Against the backdrop of below-median 2024F P/E valuation of 13.6x, improving corporate earnings prospects, highly compelling dividend yields, low foreign shareholding low of 19.5% (Exhibit 10) and prospects of a stronger ringgit towards the year-end, we expect a better end-2024 FBMKLCI conclusion amid reinvigorated expectations of infrastructural rollouts with a firm government mandate.
  
  However, this is tempered by slowing global economic growth and shifting expectations of the timing of US Federal Reserve cuts, which will drive volatility across all markets, coupled with moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation, 2%-hike in service tax rate to 8% in March and introduction of high value good tax at 5%-10% in May.
  
  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.

• Sector and stock selection will be key to relative outperformance given limited re-rating catalysts as our neutral sectors account for 65% of the FBMKLCI weighting. 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: The recent rally to a new 52-week high at 1,520 indicates that FBM KLCI’s near term trend appears to be turning bullish. KLCI is currently trading above its rising 20-day and 50-day exponential moving averages (EMA), implying an ongoing positive sentiment. Together with the breakout from its bullish flag pattern a week ago, upward momentum is likely to pick up in the coming months. The immediate support level is seen at the resistance-turned-support of 1,500 psychological mark, followed by 1,465. On the upside, we are eyeing the 1,530 and 1,570 resistances. Meanwhile, the longerterm resistance is set at the 1,600 round figure (Exhibit 1).

Source: AmInvest Research - 5 Feb 2024