SYNOPSIS

• The Malaysian stockmarket is expected to remain on a purple patch leading up the upcoming 14th General Election, which may be held by end of 1Q2018 or in early 2Q2018. As it is, the key index has climbed above the 1,800 points level amid the expectations of a sustained uptrend ahead and we see much of the potential gains emanating from speculative fervor along with hit-and-run tactics that could also result in substantive volatility.

• Apart from the election theme, the market will also ride on other drivers that include the government’s ongoing infrastructure developments that will benefit the construction and building materials sectors. The firmer oil prices could also give a new lease of life to oil and gas players, while a firm economic outlook where the projected GDP growth of 5.0%-5.5% for 2018 will likely provide additional impetus for the market, particularly on export and technology related companies that are beneficiaries of the stronger external sector as well consumer stocks where we see domestic spending remaining firm on the government’s various measures to address the higher cost of living. We also see politically linked stocks regaining some luster as these stocks are likely to see increased speculative interest.

• Although we see Malaysian stocks staying on the ascend and remain elevated over the next few months, we also see bouts of consolidation and profit taking as the upsides are likely to overshoot on occasions that would leave it overbought. The gyrations in global stockmarkets could also temper the upsides, but we think the consolidation spells should be short-lived as bargain hunting activities will likely provide ample support for the Malaysian stockmarket to hold up in the months leading to the upcoming general election.

• Valuation wise, the FBM KLCI trades at PERs of 15.9x and 14.8x for 2018 and 2019 respectively, which are fair as they are within its historical average of 14x-16x. However, we are also consonant that valuations are likely to stay elevated and could still exceed its historical range in view of the ongoing trading activities that would also continue to draw-in foreign funds as Malaysian equities play catch up to the strong gains in regional peer equity markets in 2017.

• With further upsides in the offing over the coming months, we believe a more aggressive strategy could be suitable to take advantage of the expected upsides on Bursa Malaysia as the local bourse also plays catch up the substantive gains that the regional peers recorded in 2017. The upsides will spur further trading plays and will help to keep market breadth on high – a sign of a healthy market.

• On the upside, we think the key index could head to the 1,870-1,893 points level - the latter being the all-time high closing and implying a potential upside of 1.5% - 3.0%, but we do not think that a new high can be formed as yet, given that the country’s economic environment and corporate earnings growth is still very much on the modest side. In the meantime, there should be firm support at the 1,750-1,780 levels ahead of the upcoming General Election, with market the backed by rotational and bargain hunting activities.

GLOBAL MARKET REVIEW – 3Q2017

Global markets remained on a purple patch in 4Q2017, riding on the more positive global economic prognosis, above expectation earnings growth and anticipation of U.S. tax reform approvals. This allowed the MSCI All World Index to post another 5.4% Q.o.Q gain in 4Q2017 and subsequently a 21.6% Y.o.Y growth for 2017 to yet another new record closing.

Wall Street edged higher moving into the final quarter of 2017 following the approval of the tax reform proposal by the Republicans in the House of Representatives which revolves slashing U.S. corporate tax rate to 21.0% (from 35.0%) coupled with reduction in the number of tax brackets for individuals. The Dow powered past both the 23,000 and 24,000 psychological levels on 18th October 2017 and 30th November 2017 respectively, before subsequently registered its highest ever close in history at 24,837.51 pts on 28th December 2017. Gains were underpinned by technology giants like Apple, Facebook, Amazon and Alphabet. By then, the Dow recorded its ninth straight quarterly winning streak (+10.3% in 4Q2017) – the longest quarterly winning streak since 4Q2015 and consequently rose 25.1% Y.o.Y in 2017 - the biggest annual gain since 2013.

Despite the disruptions caused by hurricanes Harvey and Irma, the U.S. economy expanded 3.2% Y.o.Y in 3Q2017 – beating economists’ expectations of a 2.5% Y.o.Y increase. Also, the U.S. labour market also improved with unemployment falling to the lowest level since February 2001 at 4.1% in November 2017. Following the stronger labour data, the Markit U.S. Manufacturing Purchasing Managers Index (PMI) also rose to 55.0 in December 2017 on stronger growth in output and new orders. All the above positives were also the drivers for the U.S. equity indices to surge to new record highs in 2017.

Source: Mplus Research - 25 Jan 2018