SYNOPSIS

• Malaysian equities were downbeat in 3Q2019, decoupling from the mostly positive global equity market performance amid the sustained selling by foreigners that reached nearly RM8.0 bln YTD.

• Conditions on Bursa Malaysia are hardly improving heading into 4Q2019 as there remains few compelling catalysts on the key index stocks with valuations also mostly fair, even after the recent market pullback. At the same time, foreign fund’s net selling did little to shore up confidence on Malaysian equities and this will keep the Malaysian market subdued for longer, in our view.

• The country’s still lackluster economic outlook is also seen as an impediment to the market’s medium term performance and could reinforce the subdued market conditions heading into 2020.

• For now, we think the key index will be attempting to build up a base around the 1,550-1,560 points level over the near term, with possible year-end window dressing activities putting the FBM KLCI around the 1,600-1,620 level to end the year. However, further gains could be more difficult to come by due to the absence of fresh buying, particularly from foreign sources, and the already fair valuations. If the 1,550 level fails to hold, however, the 1,500 level will be the next major support.

• Meanwhile, the FBM Small Cap index has been on a purple patch despite the generally low following. While there are still possible near term gains, despite the overbought conditions, we think that the upsides will be limited until a consolidation phase takes its course which could then prompt a new upcycle on some of the lower liners and broader market shares.

• Valuation wise, Malaysian stocks are mostly fairly valued with the FBM KLCI’s PERs at 16.5x and 15.5x for 2019 and 2020 respectively. The PERs are well within its historical forward averages of 14x- 17x and with fewer catalysts, coupled with the continuing lack of following, we continue to see low odds of significant medium term upsides. The FBM EMAS’ valuations for 2019 and 2020 of 16.6x and 15.3x are also fair, lingering within the 14.0x-16.5x historical forward average ranges.

• Earnings growth should be firmer in 2019 with the FBM KLCI and FBM EMAS set to register earnings recovery of 20.0% Y.o.Y and 36.9% Y.o.Y respectively. Going into 2020, earnings growth should still be available with the FBM KLCI and FBM EMAS set for growths of 6.4% Y.o.Y and 8.4% Y.o.Y respectively, both of which are still lower than the previous forecast growth of about 10.0% Y.o.Y each.

• We continue to advocate a mostly defensive strategy due to the still uncertain market outlook that is devoid of compelling leads for market players to follow. At the same time, the still anemic economic conditions, coupled with the continuing threats to corporate earnings growth, could prompt most market players to remain on the sidelines for longer. Amid the low risk appetite, our preference is still on stocks with sustained earnings that will help to mitigate the shortfall in investor confidence on the in general. As it is, we still think that there are companies with firm earnings growth potential, going forward, and is currently overlooked due to the insipid market conditions.

Source: Mplus Research - 31 Oct 2019