SYNOPSIS

• 2014 proved to be a significantly more difficult year for equities as the global economic growth prospects came under increasing scrutiny despite the massive monetary injections over the past few years. The volatility increased in 2H2014 which was roiled by the combination of lower economic growth forecast, a slump in oil prices and escalating geopolitical concerns – placing a big dampener on the year’s stockmarket performance.
• Global economic growth rates continue to be trimmed amid the patchy recovery pace in Europe, while growth in China and Japan continues to stutter. Only the U.S. economic outlook appears rosier, but still at a relatively benign pace. The low growth environment is set to continue in 2015 amid the deflationary concerns, uncertain growth in Asia and the “start-stop” recovery in Europe. The prevailing low oil prices will also have adverse knock-on effects on countries with high dependency for oil income.
• Malaysia’s GDP growth is trimmed to 4.5%-5.5% (from 5.0%-5.5%) for 2015 to reflect the more difficult economic environment. While oil and gas activities could wane due to the cutback of Petronas’ capex, the government remains committed to the development budget, which is welcomed for its broad multiplier effects. The flood repairs will also aid the construction and related sectors. However, the impending implementation of the GST in April could leave a muted effect on domestic consumption and business activities, which could linger until 4Q2015. Tighter lending, high household and government debts are also seen as major impediments to domestic investment and spending, albeit inflation will be milder with the lower oil prices.
• The constant economic headwind means volatility will be omnipresent among the global equities in 1Q2015, with downside bias increasing due to fewer positive catalysts. Concerns over the low oil prices, insipid economic growth, unsettled structural issues and currency anomalies will continue to affect sentiments and propagate a flight to safety with investors preferring equities and other financial assets in developed markets. Meanwhile, global equity valuations remain fair at around 15.0x for 2015, despite the cut in earnings growth.
• We also see volatile conditions on Bursa Malaysia in 1Q2015 and the downside bias remains in play for now. Many of the same concerns that had dampened market sentiments last year - low corporate earnings, high valuations, fewer catalyst, and weaker currency will remain. The unsettled crude oil prices will also dictate Bursa Malaysia’s near term performance, but domestic issues like the GST implementation, rising cost concerns, high household and government debts, tighter bank lending practices, weaker currency, slower consumer spending and potentially lower corporate earnings growth will weigh-on market sentiments for longer.
• Despite the challenging market environment, we think selected stocks in the oil and gas and construction sectors are worth a re-look for their strong earnings visibility. As it is, valuations have become compelling after the recent selldown and bargain hunting opportunities are available. We also think stock selection should be aligned towards defensive stocks for the near term.

Source: M+ Online Research - 9 Feb 2015