SYNOPSIS

• Going into the final quarter of the year, the Malaysian stockmarket outlook remains fluid despite the recent selldown that was prompted by the combination of weaker global earnings and economic outlook, uncertainties over the trade spat between the U.S. and China as well as potentially tighter monetary conditions. At the same time, local leads remain scant with the upcoming Budget 2019 to provide few giveaways, in our view.

• Nevertheless, the recent selldown in Malaysian stocks, resulting in the key index dipping below the 1,700 points, is already overdone. The selldown also resulted in the FBM KLCI’s PERs falling to 16.3x and 15.2x for 2018 and 2019 respectively, which are fair as they are now within its historical range of 14x-17x. On the FBM EMAS, its PERs are now at 15.1x and 14.1x for 2018 and 2019 respectively – which are also within its 14.0x-16.5x historical range, albeit earnings growth is expected to stay anemic over the next two years.

• Meanwhile, global stocks are still consolidating and the outlook is more challenging due to unsettled U.S-China trade dispute. At the same time, corporate earnings and economic conditions may have peaked, suggesting that significant upsides may be more difficult to come by, albeit we still think a recovery in global stocks are in the offing after the recent steep falls.

• Economically, the global economic performance is set to slower growth ahead as the combination of protectionist trade measures, softer global economic conditions and rising interest rates dampening the growth prospects. The effects of the U.S’ tax cuts will also fade in 2019 and coupled with its tighter labour market, its economic growth could be stifled.

• Malaysia’s economic performance is also on a lower gear due to the government’s tighter fiscal condition and reduced spending over the next two years. GDP growth is expected to moderate to 4.5%-5.5% in 2018 and 2019 in line the more difficult operating environment. Furthermore, new taxes cannot be ruled out as the government attempts to cover some of its fiscal shortfall, which may prove to be unpopular and could be detrimental to earnings growth prospects.

• Despite the current stockmarket malaise, we continue to think the FBM KLCI will hold up with the continuing institutional support. Therefore, we see the key index potentially nudging close to the 1,750- 1,800 points level towards the end of the year on the back of an overdue recovery and bouts of window-dressing activities. However, further gains will be harder to come by due to the weak earnings growth prospects. Hence, we think the 1,800 levels will serve as the major hurdle to clear. On the downside, the FBM KLCI should be able to find firm support around the 1,600-1,650 levels.

• Meanwhile, the lower liners and broader market shares remain undervalued with PERs of 8.6x and 7.0x for 2018 and 2019 respectively, significantly below its historical average of 20.0x. Although value has emerged, the uncertain market direction, coupled with the lack of positive leads, is leaving more market players on the sidelines for longer. Still, we think the lower liners are poised for a rebound as they are already oversold. On the whole, we continue to advocate a mostly defensive strategy in line with the still uncertain market direction.

Source: Mplus Research - 30 Oct 2018