Synopsis

• The FBM KLCI has performed well in the latter part of 2Q2019 to play catch-up to the gains in regional equities, despite the lingering concerns over corporate earnings growth outlook and the still difficult economic environment. After an overbought spell, however, the FBM KLCI is undergoing a consolidation spell, placing the key index near the 1,650 level, which should provide some measure of support. Nevertheless, we think that further gains could become more difficult to attain as there is little change to Malaysia’s corporate fundamental outlook.

• We also think that foreign participation is likely to remain thin over the foreseeable future in view of the lack of sustainable catalysts and their absence could see market conditions staying subdued for longer. Although we see scant upside potential over the medium term, we also see little selling pressure as the foreign selldown has ebbed. Therefore, we see local funds continuing to provide support and this should keep key index stocks afloat for longer.

• There is no change to Malaysia’s economic prognosis for the remainder of 2019 with growth to slow amid the challenging external sector that could sap the country’s exports performance. Although recent economic indicators suggest that 2Q2019’s performance could be decent, the 2H2019’s outlook remains clouded by the uncertain global economic outlook that is likely to affect the country’s economic performance.

• For now, we think that the FBM KLCI could remain largely indifferent, awaiting for more local and foreign leads to renew interest on the heavyweights. At the same time, valuations are fair and as such, we see the 1,700 points level becoming a major hurdle and even if it is passed, the 1,730 level – its high in February 2018 will be the formidable level to clear over the medium term. On the downside, we see the 1,650-1,660 levels providing the immediate support, but if it fails to hold, the 1,600 points level should serve as the major support.

• The FBM Small Cap and broader market shares are overbought after their recent runup and could be set for a consolidation spell. Still, we see most of the YTD gains preserved as valuations of FBM Small Cap listed stocks are still compelling with forward PERs at 13.2x and 11.4x for 2019 and 2020 respectively, remaining well below its longer-term average of 20x.

• After the recent market pullback, Malaysian equities have retreated from the expensive territory to fair with the FBM KLCI’s 2019 and 2020 PERs at 16.8x and 15.7x respectively, which are within its the 14x- 17x historical forward averages. With valuations already fair, coupled with fewer catalysts, we also think that upsides could be limited for the FBM KLCI, in our view.

• With Malaysian equities remaining uncertain, we still think that a broadly defensive strategy should be pursued to minimise portfolio volatility. Also, high dividend yielding stocks will continue to appeal to more conservative investors for portfolio resilience and hedge against the expected rise in market volatility.

Source: Mplus Research - 26 Jul 2019