We are cautious, but we are not pessimistic. The same issues that had weighed in 2022 will continue to be prevalent in 2023, though to varying (and perhaps lessening) extents. While we are not as pessimistic of 2023, we do expect challenges to persist in 1H 2023 and as such see market conditions to be volatile and moderately weak as various factors play out, though certain others could jump-start optimism in the local bourse (page 13).

Economic Outlook: The global economy is experiencing a broad-based and sharper-than-expected growth slowdown and persistent inflation, as uncertainties continue to obstruct outlook for 1H 2023. With excessive post-COVID consumer demand, bloated retail inventories and inflation being higher than it has been in several decades continuing to weigh on global growth in 2023, we believe global GDP growth will slow further below 3%, in line with International Monetary Fund’s (IMF) latest forecast of 2.7% (2022E: 3.2%). China’s economic growth to improve, but remain bumpy in 2023. Malaysia’s economy is expected to remain resilient however, with domestic demand continuing to drive growth amid softening global environment, critical to mitigate the slower exports in 2023 (pages 2 – 12).

Market outlook. Malaysia (by extension, the FBM KLCI) continues to struggle to break out of its range-bound trading band, though there are sufficient reasons to warrant continued exposure in the market even as uncertainties and resultant volatilities remain an ongoing feature. While headline economic growth numbers exhibit moderation going into 2023, output in absolute terms (average per quarter) in 2023 will be similar to that of 3Q2022 and/or 4Q2022. In short, if one did not feel pronounced economic pain in recent times, 2023 should be no different despite the moderating numbers. All said, outperformance from navigating a tougher year will still have to come from a longer-term bottom-up approach. (page 17)

The market is attractive from the long-term standpoint and compelling from the shorter-term perspective. The last time markets went to “distress’ levels like 3 SD below long-term average and 2 SD below long-term average were financially catastrophic events. Most other shocks to the system saw markets falling to 1 SD below long-term average before subsequently rebounding. We see the current market lull as temporal in nature. (page 18)

1H 2023 will remain uncertain as global economies work through the full effects of aggressive rate hikes over the last 6 months, with some tipped to fall into recession. Sentiment is weak, understandably, but the market is also relatively undervalued (now more so) with the earnings picture not having been altered dramatically post the 3QCY22 result reporting despite cautions for heightened risks. We wouldn’t be in a hurry to get into the market at this juncture, but retain sufficient optimism to suggest buying into market weakness to ride on the upside going into 2H 2023. (page 20)

Market interest appears to have seen a clear shift toward smaller-capitalized stocks in investors’ attempts to uncover undervalued gems. Larger-capitalized stocks (reflected by higher average stock value traded) will always retain interest, though more pronounced activity will only be likely when there is sustained foreign investor activity. Early signs indicate possible interest going into 2023. Our year end 2023 closing for the FBM KLCI is 1,650pts based on a 15x (-1SD to the FBM KLCI’s short-term average) multiple to CY23 earnings. (page 22)

In step with our ongoing preference for stocks likely to see multi-year growth stories and earnings stability, Able Global, D&O Green Technologies, Inari Amertron, and SKP Resources are retained amongst the smaller-capitalized stocks as suggested picks for 2023. Gamuda and Maybank are retained as suggested picks for 2023 amongst the larger-capitalized stocks. CCK Consolidated, Genting and IJM Corporation are included for their respective investment merits, also in line with our OVERWEIGHT stance on the Consumer, Construction, Gaming (and Technology) sectors. (page 23)

Source: PublicInvest Research - 16 Dec 2022