Investment Highlights

• Maintain base-case end-2024 FBM KLCI target at 1,550, pegged to a 2024F P/E of 14.5x – slightly below its 5-year median of 14.7x (down slightly from 14.9x in early January), which is likely to decline over the next quarter given persistently low post- pandemic valuations.
  
  Our conservative base-case target stems from: i) an appreciating MYR towards the end of the year that could unravel foreign equity inflows attracted by the weak currency, ii) slowing global economic growth prospects, iii) less-optimistic expectations of the timing of US Federal Reserve cuts, which will drive volatility across all markets, and iv) moderating domestic consumption amid rising domestic inflation from targeted subsidy rationalisation and imposition of a 2%-hike in service tax rate to 8% in March and the deferred high value good tax of 5%-10%.
  
  Even so, downside risks are mitigated by Malaysian equities offering below-median 2024F P/E valuation of 13.6x (Bloomberg’s consensus valuation), improving corporate earnings prospects, compelling dividend yields of 4%, low foreign shareholding low of 19.9% amid reinvigorated expectations of infrastructural rollouts with a firm government mandate.
  
  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 1,340, pegged to 2024F P/E of 12.5x at -1 SD below the 5-year median.
  
  The best-case scenario from an abrupt US Federal Reserve policy reversal, stronger domestic government rollout of infrastructural projects and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,700, pegged to 2024F P/E of 15.9x at 0.5 SD above the 5-year median.

• FBMKLCI earnings growth prospects dwarfed by regional peers. Our 2024F FBMKLCI earnings growth of +13.3% is slightly ahead of Bloomberg’s +11.4%. For FY2025F, this is expected to decelerate to +8.4% vs. Bloomberg’s +4.8%.
  
  Even based on our more sanguine 2024F corporate earnings growth for FBMKLCI, Malaysia is dwarfed by Bloomberg’s estimate of +58% for Korea, +42% for Japan, +36% for Vietnam, +32% for Indonesia, +28% for Taiwan and +18% for Philippines .

• Foreigners reverted to selling. As the ringgit marginally strengthened in March, the FBMKLCI slid 1% MoM as foreigners reverted to net selling of RM2.9bil, more than erasing their purchases of RM2bil in Jan-February. 55% of the March net sales were in the financial sector, followed by plantation (13%) and industrial products/services (9%).
  
  In March, foreigners sold out of Public Bank, CIMB, RHB Bank, Hong Leong Bank, Maybank, KL Kepong, Petronas Gas, Inari Amertron and Petronas Chemicals . The impact of the net foreign selling activities was largely offset by local institutional buying of RM3.6mil. Except for YTL Power International and YTL Corp, which were bought into by local institutionals, the rest of the stocks purchased were the mirror of those which foreigners were selling .

• Reversal to foreign outflows from ASEAN region. Foreign equity funds gravitated towards Korea (RM18bil) and India (RM17.5bil) in March while the ASEAN region experienced a net foreign equity outflow of RM7.8bil compared to an inflow of RM4.6bil in Jan-Feb 2024, leading to a YTD outflow of RM3.2bil.
  
  The only Southeast Asian countries that drew in foreign equity flows was Indonesia with RM2.4bil, bringing YTD inflows to RM7.9bil as the country enjoyed 4 consecutive months of inflows since Dec 2023.
  
  Meanwhile, Malaysia’s YTD net foreign equity sales of RM869mil was dwarfed by Thailand’s RM9.1bil and Vietnam’s RM1.9bil.

• Mild Malaysian equity valuations against the region. With support from the Jan-Feb foreign institutional buying activities, FBMKLCI still posted a YTD rise of 5.9%, outpacing Korea’s +3.9%, India’s +2.7% and China’s +2.2% while Hong Kong and Thailand slid 3%.
  
  The monthly rolling forward of FBMKLCI’s 5-year median forward P/E led to a lower 14.7x from 14.8x in the previous month vs. pre-pandemic 2017-2019 median of 17x due to persistently low post-Covid19 valuations. The FBMKLCI’s 2024F PE of 13.6x (Bloomberg’s valuation) translates to a mild -0.5 standard deviation (SD) below the latest 5-year median, yet overshadowed regionally by Hong Kong’s -1.7, Philippines’ -1.1, Singapore’s -1.0, China/Vietnam’s -0.8, Thailand/Indonesia’s -0.6 .

• Soft US landing scenario with 2024F year-end MYR target of 4.50. Our in-house economist maintains a baseline “soft- landing” economic scenario for the US with Fed rate cuts of 75-100 basis points in 2H2024. However, US Federal Funds futures contracts are currently pricing in expectations of 4 US Federal Rate cuts this year vs. earlier anticipation of 7 reductions in the beginning of January. This still appears optimistic given the current consensus expectation of US inflation rate of 2.8% 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 maintains 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.
  
  We note that the FBMKLCI has a strong negative correlation coefficient to USDMYR of -0.65 to -0.75 for the past 3-10 years . This could mean that a stronger ringgit towards the end of the year could mean a reversal in foreign equity inflows. However, we acknowledge that a slower-than-expected US rate cut could lead to persistent MYR weakness and consequently, volatile foreign equity flows for the rest of the year.

• 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 remain OVERWEIGHT on oil & gas, construction, technology, manufacturing, ports, power, property, REIT, glove and transportation sectors.
  
  We have replaced 3 of our top 10 picks with Hong Leong Bank, IOI Properties and Greatech Technology (initiating coverage today) instead of CIMB Group, Mah Sing Group and Sunway as their share prices have reached near or above our fair values. Our other top picks are RHB Bank, Tenaga Nasional, Telekom Malaysia, Gamuda, Dialog Group, IOI Properties, Yinson, Pavilion REIT.
  
  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 . For dividend plays, we like REITS such as YTL Hospitality, Pavilion, UOA, Sunway and IGB as well as RHB Bank, Maybank, Paramount Corp, MBM Resources and CIMB Bank.
  
  Our ESG champions are Maybank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Inari Amertron, Sunway Holdings, Gamuda, Sunway REIT, Westports Holdings and Yinson Holdings .

• Technical analysis: Ever since the FBM KLCI broke out to a new 52-week high in February, the index has been stabilising above the 1,500 support, which is the resistance-turned-support horizontal area. We believe this sideway movement represents a base-building period for the KLCI. As its 20-day exponential moving average (EMA) and 50-day EMA are still edging upwards, we believe that the current trend may still have more upside in the near term. KLCI may potentially push higher from here, with support set at 1,520 and 1,500 psychological mark. The next crucial support is seen at 1,465. On the upside, we now anticipate the resistance level at 1,560, followed by the 1,600 round figure .

Source: AmInvest Research - 2 Apr 2024