SYNOPSIS

• We see the Malaysian stockmarket holding up for longer that will also allow the key index to cast aside most of the vagaries on foreign equity indices with institutional players providing the market support. This will allow the key index to weather the global equity market volatility that is likely to emanate from the Federal Reserve’s quantitative tightening process and a potentially tighter global trade environment. Hence, we expect the key index to remain broadly steady around the 1,850 and 1,880 levels with election plays and politically linked stocks to provide the much needed support.

• Similar to the recent market trend, however, we also expect bouts of consolidation and profit taking to sap some of the potential gains, even though we see the key index holding up for the most part until the General Election. We also think the consolidation spells may remain short-lived with bargain hunting activities likely to set-in and to provide ample support to hold up the market for longer.

• We do not rule out a relief rally and potentially a new record closing if the incumbent party retains power in the upcoming election as the large-scale infrastructure projects will be implemented as planned. Still, we think the potential gains may be short-lived as earnings growth considerations will ultimately dictate share prices. In the lead up to the election, however, significant upsides may still be elusive given that many market players are wary over the outcome of the election and is opting to stay on the sidelines until there is a clearer market direction.

• Meanwhile, corporate earnings growth of 6%-11% Y.o.Y in 2018 and 2019 are expected to remain modest amid the rising cost pressures in most sectors and slow business pickup, albeit the still sanguine external sector will provide a cushion to earnings growth. Also, the FBM KLCI trades at PERs of 16.6x and 15.4x for 2018 and 2019 respectively, which are already fair as they linger within the 14x-16x historical forward PER range. The FBM EMAS’ PERs of 16.7x and 15.2x for the next two years, however, are still slightly ahead of the 13x-15x range of historical forward PERs. Hence, we view the already fair market valuations providing little impetus for the Malaysian equities to head significantly higher over the medium term.

• While there remains significant volatility due to still uncertain global equity market environment and elevated valuations in many global indices, we think the recent volatility provide opportunities to pick-up beaten down stocks and industry leaders that promises continuing earnings growth over the next two years.

• We also think that the lower liners and broader market shares are seeing increased value propositions after their rout over the past two months has left indices like the FBM Small Cap tethering at its two-year low, which we believe is overdone. The FBM Small Cap index’s forward PERs at 9x-11x for the next two years are also significantly below its 10-year average of 18.0x and we believe that the low valuations provide substantive bargain hunting opportunities, particularly on beaten-down industry leaders.

Source: Mplus Research - 27 Apr 2018