SYNOPSIS

• Malaysian equities remain downbeat in 4Q2019, trading within a range bound mode amid the mostly positive global equity market performance as the sustained selling by foreigners that stood at RM11.14 bln for the year piled pressure on the key index’s performance.

• Conditions on Bursa Malaysia saw some improvement heading into 2020 with the key index’s valuations turned slightly appealing, but the lack of fresh catalyst could continue to bring the local bourse’s recovery to lag behind its’ regional peers. On a brighter note, the FBM KLCI may continue to play catchup with gains across the regional peers, supported by the recent rally in commodity prices.

• 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. Although the government remains committed to support the country’s well-being, the fiscal deficit may continue to keep economic growth in check.

• For now, we think the key index will be attempting to build up a base around the 1,600 psychological level over the near term, with possible bargain hunting activities pushing the FBM KLCI towards the 1,635-1,640 level in coming months. However, further gains could be more elusive due to the absence of fresh buying, coupled with the un-relenting foreign fund disposal of Malaysian equities. 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 that demonstrated improved activities is warrant for a consolidation to allow further room for rally. Although the lower liners are teetering around the overbought zone, we think that the upsides will remain apparent amid the bargain hunting and rotational play.

• Valuation wise, Malaysian stocks are mostly fairly valued with the FBM KLCI’s PERs at 15.8x and 14.9x for 2020 and 2021 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 2020 and 2021 of 16.0x and 14.6x are also fair, lingering within the 14.0x-16.5x historical forward average ranges.

• Earnings growth should be firmer in 2020 with the FBM KLCI and FBM EMAS set to register earnings recovery of +15.9% Y.o.Y and +38.2% Y.o.Y respectively. Much of the earnings growth is mainly due to recovery from the bottoming out of the sluggish corporate earnings recorded in 2019 that is expected to only improve +9.6% Y.o.Y and +4.4% Y.o.Y in the FBM KLCI and FBM EMAS.

• Although we continue to advocate a defensive strategy on the uncertain market outlook, we see rotational play taking shape, particularly in plantation, oil & gas, construction and technology shares. At the same time, companies with firm earnings growth potential, going forward, is expected to outperform.

Source: Mplus Research - 21 Jan 2020