SYNOPSIS

• Malaysian equities was largely in sync with the global equities rout in 1Q2020, slumping to hit the lowest level since September 2009 on the Covid-19 pandemic that brought global economic activities into a standstill, whilst foreign funds continue to offload Malaysian equities amounting to RM7.63 bln in the first quarter of the year compounded to the weakness on the key index’s performance.

• Conditions on Bursa Malaysia, however, saw some improvement heading into 2Q2020 with the key index’s valuations turned appealing and subsequently fueled bargain hunting activities. At the same time, the recovery will be supported by the massive economic stimulus package announced by the Malaysian government, coupled with anticipation of a rebound in commodity prices.

• The recovery, however, may be measured in view of the number of Covid-19 cases continues to ascend across the globe which may continue to see economic activities stalling for longer. As it is, strong and coordinated efforts are required globally to contain the Covid-19 pandemic and minimise its economic impact, especially at the most vulnerable.

• For now, we think the key index will be attempting to build up a base around the 1,300 psychological level over the near term, with possible further recovery powering the FBM KLCI towards the 1,400- 1,455 level over the foreseeable future. Beyond that, room for further upsides could be more elusive due to the absence of fresh buying, coupled with the un-relenting foreign fund disposal of Malaysian equities. If the 1,300 level fails to hold, the 1,210 support level will come into play.

• Meanwhile, the FBM Small Cap index that exhibits a surge in trading activities is warrant for a consolidation or even a mild pullback to allow gains to be digested. We are also cautious that gains will be measureable in view of the impending weakness of corporate earnings.

• Valuation wise, Malaysian stocks are broadly fairly valued with FBM KLCI’s PERs at 15.1x and 14.1x for 2020 and 2021 respectively. The PERs are well within the lower band of historical forward averages of 14.0x-17.0x. Meanwhile, the FBM EMAS’ valuations for 2020 and 2021 of 15.1x and 13.8x are also fair, lingering within the 13.5x-16.0x historical forward average ranges.

• Despite the challenging outlook, earnings growth should still be available in 2020 with the FBM KLCI and FBM EMAS’ earnings set to climb of +3.4% Y.o.Y and +1.1% Y.o.Y respectively. Much of the earnings growth will only be available in 2H2020 as earnings bottomed up from the sluggish numbers delivered in the previous corresponding period, whilst economic activities may regain momentum.

• Under the prevailing market conditions, we continue to advocate a defensive strategy on the uncertain market outlook, favoring high dividend paying stocks like banking and utilities companies for portfolio stability as well as for a source of recurrent income stream. We also adopt a hit-and-run technique for lower exposure to the market volatility as the recent rebound still too early to perceive that global markets have bottomed.

Source: Mplus Research - 13 Apr 2020