SYNOPSIS

• Bursa Malaysia’s purple patch has been on an extended run as it continues to take cue from the positive vibes on most global stock indices and although the market’s valuations remains elevated, the near-to-intermediate outlook is likely to stay positive – in tandem with the general positive performance of overseas stock markets.
• Malaysia’s general election theme will also encourage domestic market players to remain active and already this is reflected in the strong market depth and breadth since late last year that implies strong market interest. So long as both market depth and breadth stays elevated, the Malaysian stockmarket’s outlook will remain positive. For now, the 1,780-1,800 levels could prove to be the major hurdle for the key index to clear, but the 1,750 level should provide some near term support. In view of the still largely positive market undertone, we think there should be firm market support at the 1,650-1,680 levels for the time being.
• Notwithstanding the potential market upsides, we also think that the gains could be punctuated by increased bouts of choppiness and profit taking activities as the combination of stretched valuations, still slow economic growth and insipid earnings growth prospects could also keep a lid on the upsides. As it is, valuations remain stretched with the FBM EMAS’ PERs at 16.8x and 15.5x for 2017 and 2018 respectively, above its historical forward PERs of 14x-16x. Similarly, the KLCI’s PERs at 16.5x and 15.6x for 2017 and 2018 respectively are above its historical averages of 13x-15x; thus, the higher valuations may limit the market’s uptrend as stocks are already bordering overpriced.
• We also see global equity markets continuing to hold up and the downside risk is limited for now as market players await for more positive developments in the global economy as well as President Trump’s economic stimulus that could further bolster the U.S.’ GDP growth over the coming 2-3 years. In addition, corporate earnings growth prospects are also looking healthier with the MSCI All World Index poised to record stronger earnings growth of 26.6% Y.o.Y and 11.3% Y.o.Y for 2017 and 2018 respectively.

• For 2017, BNM is raising its 2017 GDP forecast to 4.3%-4.8% Y.o.Y - higher than the 4.0%-5.0% growth target earlier with domestic demand again the growth driver as there are still firm employment prospects, continuing BR1M payouts and employees’ reduced EPF contribution to drive spending. The external sector should also see improvements that would also help to shore up the country’s economic prospects, albeit there continues to be some hesitation in the growth trajectory.

• With equity valuations already rich, there are certainly fewer short-term buying opportunities as investors await for corporate earnings to play catch up. Hence, we think portfolios should be tweaked towards longer-term plays and stocks should be positioned on sectors that are poised to see renewed focus and potential extended recovery in the likes of the construction, technology and oil and gas sectors

Source: Mplus Research - 26 Apr 2017