About two months or so ago, market direction was dictated by concerns over banking defaults in the US, and its potential contagion on the global financial system. Just under a month ago, market direction was dictated by pronounced concerns over a potential sovereign debt default in the US as lawmakers continued to argue over the nation’s debt limit (but which has since been resolved, delayed rather). New day, new issue, same outcome – market uncertainty and lethargy. [page 14].

Economic Outlook: The global economy stands at a critical crossroad, poised for a challenging and protracted journey towards achieving robust and sustainable growth. The deceleration of global GDP expansion observed throughout 2022 has prompted concern, but several negative factors are now starting to unwind. Despite the significant and coordinated tightening of monetary policy by central banks worldwide since the early part of last year, consumer spending has displayed remarkable resilience. However, we anticipate that the effects of the tightening measures implemented in 2022 will continue to constrain demand growth, with their full impact becoming more apparent later this year or early 2024. [pages 2 – 13].

Market outlook. The FBM KLCI is struggling to show any semblance of positivity, unlike its regional peers, despite being supported by encouraging economic fundamentals. The narrative remains unchanged the world over – the same issues that had weighed in 2022 continues to be prevalent in 2023 though dissipating at a better-than-expected rate. Why are we affected worse than the rest then? From a market standpoint, we should have seen the worst in 2022, with regard to the above. The world seems to have moved on, but not Malaysia. Though the FBM KLCI (and the broader market) is failing to break out of its range-bound trading band, sufficient reasons still warrant continued exposure in the market. [page 15 – 18]

The market remains attractive from the long-term standpoint and compelling, shorter-term. 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 bouncing back. [page 16]

1H 2023 has indeed proven to be uncertain (unstable, even) as global economies worked through the full effects of aggressive rate hikes over the last 12 months. Sentiment is weak, understandably, though the market remains relatively undervalued (now more so) even with the earnings picture having deteriorated in recent times. Admittedly, the market does currently lack a strong re-rating catalyst apart from its relative undervaluation, with a reversion-to-mean being the only key macro play for now. On an encouraging note, the worst of economic related stresses appear to behind us. [page 19]

As the market remains a very trading-oriented one in the face of uncertain macro conditions, we would continue to suggest accumulation in the market on ongoing weakness to ride on the recovery going into 2024. Our year-end 2023 closing for the FBM KLCI is unchanged at 1,530pts based on ~15x (-1SD to the FBM KLCI’s short-term average) multiple to CY23 earnings, the lower multiple to account for prevailing (weaker) market sentiment. [page 19]

Going into 2H 2023 / 2024, we continue to believe in the prospects of CCK Consolidated and SKP Resources as the smaller-capitalized picks, despite 1H 2023 consumption-led weaknesses. Gamuda, Genting, IJM Corporation, Inari Amertron and Maybank are picks amongst the larger-capitalized stocks. AMMB Holdings, CIMB Group Holdings and Dayang Enterprise are included for their inexpensive forward valuations and strong earnings growth prospects meanwhile, in place of Able Global and D&O Technologies [page 21]

Source: PublicInvest Research - 26 Jun 2023