SYNOPSIS

• Malaysian stocks have been broadly on a sideway trend for most of the previous quarter, but has taken a downturn over the past month after it failed to breach the 1,800 points level. We see more of the insipid trend ahead as stock valuations continue to tether on the fairly valued side. This leaves little room for equities to spring higher. In addition, there are also few noteworthy and sustainable domestic catalysts for market players to follow as Budget 2018 saw few giveaways to corporates.

• While we see the key index going nowhere, we also think that there should be substantive support for the market to hold up amid the improving economic outlook that could also help to shore up longer term earnings growth. We also maintain the view that the current consolidation trend as healthy to allow the gains attained earlier in the year to be digested and to allow the market’s valuations to return to more decent levels, whilst waiting for earnings to play catch up.

• Earnings performance have been patchy in 2Q2017 with the FBM KLCI reporting a 6.3% Q.o.Q contraction, while on a Y.o.Y basis, corporate earnings growth was just a measly 1.0%. On the broader FBM EMAS, however, there was a growth of 5.5% Q.o.Q. and 4.6% Y.o.Y, albeit the growth rates were still below expectations. With the earnings coming in largely below expectations, the growth rate for the full year has been trim to 5.6% Y.o.Y (from 7.3% Y.o.Y) for the FBM KLCI and 19.2% Y.o.Y (from 21.1% Y.o.Y) for the FBM EMAS.

• There is little change to the FBM KLCI’s PERs at 16.4x and 15.4x for 2017 and 2018 respectively, staying above its historical average of 14x-16x and implying that the market is already fairly valued with upsides continuing to be curtailed by the toppish valuations. The FBM EMAS is trading at PERs of 16.8x and 15.4x for 2017 and 2018 and well above its average forward PERs of 13x-15x. Unless corporate earnings growth post a faster recovery, both the FBM KLCI and FBM EMAS’ stretched valuations will serve as the major impediment for the Malaysian stock market to head significantly higher, in our view.

• Under the prevailing environment, we think the FBM KLCI could continue to tether around the 1,730- 1,740 points levels for longer as a meaningful recovery remains elusive over the near term with few positive catalysts. Until there are further signs of earnings growth upgrades or further strengthening of the country’s economic outlook, we think the key index could remain bounded between the above levels to around the 1,750 level. Prospects of further upsides to the 1,780-1,800 levels appears feeble for now as earnings growth have yet to catch up.

• With earnings growth still slow to recover, we continue to advocate a longer term strategy to pick up industry laggards where earnings growth can be sustained over the next few years. As it is, many stocks that had a strong run in 1H2017 are retreating to more palatable levels, which we think are worth accumulating as potential recovery plays going into 2018, where we expect the market to stay firm ahead of the upcoming General Election.

Source: Mplus Research - 3 Nov 2017