SYNOPSIS

• Despite three consecutive years of contraction, the Malaysian stockmarket’s direction is likely to remain generally listless and volatile in general over the next few months as there are little improvements in the present market environment where the insipid domestic economic outlook, difficult external sector, slow corporate earnings recovery prospects and the general risk-off approach to equities amid the lingering crisis of confidence, will continue to dominate market sentiments.

• Nevertheless, we think there remains near-term trading opportunities as Bursa Malaysia stocks mirrors the performance of the mostly positive key global and regional indices as the macro environment is still holding for now. This could also allow the key index to extend its recovery to around the 1,700-1,720 points level over the near term as trading activities takes hold.

• We also expect continuing trading interest among the stocks on the broader market and the lower liner stocks amid the renewed interest following their general weakness in 2016. As it is, the positive performance of overseas stockmarkets have also allowed many stocks in the above sectors to mount a decent recovery since late last year and we expect rotational plays and quick profit taking activities to dominate trades over the near term.

• Meanwhile, the FBM KLCI’s 2017 and 2018 PERs of 15.6x and 14.6x respectively are fair as they are within its historical averages. The FBM EMAS’ PERs of 15.7x and 14.4x are also fair, thus we think the upsides could be capped amid the still slow corporate earnings recovery prospects in 2017.

• Although Malaysia’s GDP performance was ahead of expectations in 3Q2016, there remain substantive challenges in 2017 as the economy continues to grapple with the difficult external environment and slower domestic activities, unstable Ringgit as well as higher cost pressures that could affect margins.

• The prognosis is for much of the slow growth in most global economies to also persist as consumer spending and fresh investments are likely to remain on the tepid side. The mild global economic growth is expected to be held up by the stabilisation and slight uptick of oil and other commodity prices that will also aid the recovery of resource rich countries. The general qualitative economic factors are also expected to main a steady uptick – lending credence to a potentially 3.2% Y.o.Y global GDP growth in 2017, but policy headwinds are increasing with potentially higher interest rate hikes in store and tighter stimulus measures. Furthermore, threats of higher protectionist policies could also undermine global growth going forward, particularly for emerging markets.

• Although the Malaysian stockmarket is currently on a purple patch, we would continue to advocate a mostly defensive strategy in 1Q2016. We also think Buy on Weakness strategy should be considered on sectors with significant news flow like the construction and beaten down industry leaders in the oil & gas, banking, telecom and consumer stocks, where we think their earnings quality should improve in 2017 after a difficult 2016.

Source: Mplus Research - 26 Jan 2017