SYNOPSIS

• Even after the FBM KLCI’s pullback in 4Q2018, the outlook remains indifferent as there are still few catalysts in early 2019 to lift market sentiments. At the same time, domestic leads are also far-and-in between with domestic business and economic activities likely to drop a gear with slower economic activities as the government trims spending. Hence, we expect Malaysian equities to remain choppy in 1Q2019 on the back of the thin buying support.

• Nevertheless, the recent selldown has given rise to bargain hunting opportunities on some of the beaten-down sector leaders that have fallen over the past 4-5 months. However, we still think that the bargain hunting activities will be mild due to the still cautious market undertone.

• Globally, the prognosis going into 1Q2019 is also little changed with the equity market volatility likely to dominate the market environment due to the prospects of moderating global economic growth, rising geopolitical tensions, higher interest rates and slowing trade with the U.S-China trade war still in effect. At any rate, corporate earnings growth, particularly in the U.S., may have peaked as the effects of the country’s tax reforms fades in 2019 as with the increasingly tight monetary conditions that could also sap earnings growth prospects.

• The Malaysian economy will also be subjected to the vagaries of the global economy, but the lack of stimulus on the domestic front will also contribute to the moderating GDP growth in 2019. Still, the slowdown is expected to be modest as the agriculture and mining sectors return to the growth path to cushion against the expected moderation in the other economic sectors.

• With the downside pressure still persisting, we think the 1,700 points level is a major hurdle for the FBM KLCI to clear. Even if the level is breached, the 1,725-1,750 levels look to be the major resistances to clear as valuations would then be toppish again. On the downside, the crucial support at the 1,650 level also appears to be under threat from the incessant selling and if it gives way, the key could slip back to its recent low of 1,600-1,625 points. Meanwhile, earnings on the FBM KLCI and FBM EMAS are set to contract in 2018 amid weak plantation, telco and O&G earnings.

• Despite the lingering undervaluation among the lower liners with the FBM Small Cap index’s PERs at 10.7x and 9.3x for 2018 and 2019 respectively, we think the strong recovery prospects remain subdued as sentiments on the lower liners are still thin amid the ongoing market uncertainty. The recent recovery is welcomed, but with most players remaining wary of the market’s direction, the recovery could be muted and short lived, in our view.

• There remains no change to our recommendation and a mostly defensive strategy should be pursued in view of the sustained volatility over the near-to-medium term. However, we do not rule out a relief rally if a trade agreement can be reached between the U.S. and China that is likely to be buoyed the prospects of trade flows resuming and potentially giving a shot in the arm to the global economic conditions to the rest of the year. Nevertheless, any relief rally is likely to be limited with stock prices likely to perch into the expensive territory again in the midst of the slowing the earnings growth outlook in 2019.

Source: Mplus Research - 25 Jan 2019