What happened: The current quarter’s reporting cycle showed some marked improvements versus the immediate preceding quarter, even as external conditions remained uncertain and domestic 3Q GDP growth slipped to 4.4% from 4.9% in 2Q. From a macro standpoint, earnings hits (above and/or in-line) and misses at 70%:30% is an encouragement vis-à-vis the 57%:43% as at 2QCY19. The oil and gas and manufacturing sectors provided the bulk of surprises, indicative of business activities finally stabilizing. The turnaround in plantations is a welcome sight as companies have not captured and/or benefited from the current CPO price up-cycle, and may be the surprise package in the upcoming reporting period.

Consensus disappointments were similar in airline, auto and media. Manufacturing and construction provided the most surprises. Plantations and oil and gas reported steadier numbers, an important sight as any significant weaknesses to these cyclically-important sectors would have called to question economic growth prospects.

Earnings cuts were more or less in line with the number of disappointments, most of which were for cost-related issues, providing some comfort that longer-term business trends remain relatively sanguine. Most cuts are also occurring this calendar year, though appearing otherwise in Table 8 (which reflects as per financial year). The recent Budget 2020 announcement is expansionary, providing some potential uplift to forward earnings expectations. Downward revisions in earnings were most pronounced for the airline and media sectors.

What we see: While the current reporting cycle did see some pronounced earnings cuts again, the bulk of which are to FY19 numbers. FBM KLCI earnings growth assumption for 2019 and 2020 are now -1.9% (@ 2QCY19: 1.1%) and 6.6% (@ 2QCY19: 6.6%) respectively. Largely moot at this point given only a month to the end of 2019, the benchmark is likely to close around 1,620 points given the earnings cuts. Importantly however, growth trajectory is expected to resume next year, which suggests the FBM KLCI target likely ending closer to 1,700 points end-2020.

Malaysia’s investment proposition for 2020 appears to be better than what it is in 2019. We now have some semblance of growth direction/initiative, as unveiled in Budget 2020 with its positive undertones. The government has stepped up (albeit in targeted manner), with consumers seemingly lacking confidence to spend and businesses appearing reluctant to invest.

On the external front, we still see a piecemeal deal (phase one) deal happening despite the apparent deterioration in US-China relations, as economic considerations will take precedence. International Monetary Fund (IMF) studies show a 0.66% negative impact to the US economy and -0.93% impact to the Chinese economy from prolonged trade battles, ~25% and ~15% hits to respective growths.

All this said, the market still appears to be struggling to break from its lull. We remain positive over its medium- to longer-term outlook however, and see the earnings cycle improving and the FBM KLCI trading higher correspondingly barring any significant economic downturns. In the interim, current self-inflicted “distractions” will need to be overcome convincingly, otherwise markets may remain in a rut for a while.

For stocks, we still like EA Technique, Mega First, Ta Ann Holdings, Serba Dinamik, Sapura Energy, Genting, IJM Corporation and CIMB Group

Source: PublicInvest Research - 3 Dec 2019