Seventeenth review. The current edition saw a notable exclusion, Yinson Holdings, which counts various institutional funds amongst major shareholders. On a broader scope, inclusions (33) outnumbered the exclusions (25). Of the 33 included, only 4 were new listings, suggesting that companies are seeing the increasing need of being shariah-compliant hence doing the necessary to warrant inclusion. None of the names excluded in the May 2021 review made it back at the first time of asking, though possibly due to timing differences given the need to rely on most-recently audited financial statements which may not have been necessarily available at the time of review. This is reflected by November 2020 dropouts (Advance Information Marketing, SHL Consolidated, TAS Offshore and Turiya) making it back this round.

A marginally higher 751 (May 2021: 746) securities are now classified Shariah compliant, with the proportion slightly lower at 79.3% (May 2021: 79.7%) on account of the higher number of 948 (May 2021: 936) securities listed on Bursa Malaysia. A complete listing of changes is shown in Appendix 1.

Impact on our coverage. Since the last review, we have dropped coverage on CJ Century Logistic and Serba Dinamik Holdings, both of which are shariah compliant securities. Following this review, I-Berhad has been deemed as shariah non-compliant. With the mentioned changes, the total number of compliant stocks under coverage is now 69 of the total 82 stocks under core coverage, or 84.1% (May 2021: 70 of 84, or 83.3%). The compliance status of our coverage list is in Appendix 3.

Market impact. Of all the exclusions in this current review, Yinson Holdings is the most notable one given that it’s an institutional fund favorite A quick glance across the top 30 shareholder does not appear to show any Shariah-based fund holdings however, hence impact of this inclusion likely to be muted. Asia File Corporation counts Amanah Saham Bumiputera as a significant shareholder, though it is not known how it will categorize this particular shareholding. While there is still no compulsion for anyone to sell should investments be out-of money, past instances have suggested compliance (ie. immediate disposals) by funds regardless.

2022 may be a year of contradictions. While growth in gross domestic product (GDP) is expected to hit a commendable 5.5% to 6.5% which typically raises optimism and brightens investor sentiment owing to expectation of steady earnings growth, investors are likely to also be faced with contemplations on various “negative” prospects – lower earnings and the likelihood of lower dividends from the larger-capitalized higher-income blue chips as a result of Cukai Makmur, heightened transaction costs as a result of the hike in stamp duties which may deter trading activity, and the specter of higher interest rates which may see orientation of funds out of equity markets. In addition, structural issues like ongoing supply chain disruptions (though the expectation is an eventual easing going into 2022) and labour shortages (only industry-specific allowances have been accorded for now) may still cloud sentiment.

All said, the market will continue to be very much a trading-oriented one, though volatility may shrink notably. It is still encouraging to note that foreign investors have been net buyers in recent months, suggesting regional investor flow potentially picking up in momentum as the country’s growth prospects continue to strengthen, the above-mentioned “negativities” notwithstanding. We maintain our FBM KLCI year-end 2021 closing at 1,590 points, with the likelihood of a status quo for 2022 as well. Stock suggestions for next year remain a mix of cyclical names to capture upsides from economic re-opening, and stocks likely to see multi-year growth stories, and those from within the smaller-capitalized (likely to earn less than RM100m) and lower-geared space (not at risk of seeing compressions in valuations owing to rate hikes).

Source: PublicInvest Research - 26 Nov 2021