SYNOPSIS

• After a difficult market environment following GE 14, there appears to be some near-term reprieve for stocks on Bursa Malaysia. However, we think there remains substantive uncertainties over the Malaysian stockmarket’s performance over the near-to-medium term as the country’s untested fiscal measures under the new Pakatan Harapan government is likely to continue affecting sentiments. There are also concerns that the trade war could escalate and further undermine sentiments.

• Globally, we also think conditions have improved of late amid expectations of strong U.S. corporate earnings with the trade war and the Fed’s hawkish interest rate concerns taking a backseat for now. However, we think this could just be a reprieve as the threat of a full blown trade war remains in play. Therefore, we believe that global equities could remain broadly cautious for longer as the downside risk is still present.

• Although we think the broad market environment will still be cautious, a sustainable turnaround is probable if the trade concerns ease, as with further clarity on the government’s fiscal strategies, both of which will help to restore market confidence that is crucial to spur fresh buying after the steep falls in 2Q2018.

• However, quarterly earnings performance was a disappointment among FBM KLCI listed stocks in 1Q2018 and the forecast is now for a flattish performance for the year. The FBM EMAS’s earnings growth forecast was also trimmed and based on the latest estimates, both the FBM KLCI and FBM EMAS’ indices are already fair with prospective PERs of 16.2x and 15.7x for 2018 respectively.

• The continuing volatility calls for the mostly defensive strategy to remain for longer as there is still substantive uncertainties over the direction of global trade, which is still a major determinate of the market’s direction. Therefore, we think the key index could be hard pressed to clear the 1,800 points level over the near-to-medium term on valuation grounds. The intermediate resistance is at 1,780 while on the downside, the supports at the 1,700 and the 1,620-1,650 levels.

• Meanwhile, values have emerged in many FBM Small Cap stocks after their extended selloff, albeit the still weak buying strength is likely to leave these stocks to drift and their recovery could be limited for longer. As it is, the FBM Small Cap index is valued at a PER of 10.5x on 2018 earnings, significantly below its 10-year average of 18.5x, thus providing ample opportunity to bargain hunting on selective industry leaders, in our view.

• There are also value proposition on many of the beaten down stocks that promises sustained earnings growth over the next two as their valuations have turned attractive. In particular, selected stocks in the technology, consumer, oil and gas and even smaller construction stocks appear attractive after their recent falls. Despite the trade war concerns, there also remains upside for E&E stocks as the sector outlook continues to be buoyed by rising global demand.

Source: Mplus Research - 24 Jul 2018