2H18 Outlook: Prescription For Anaemic Conditions

Remain defensive in 2H18 as global liquidity contracts, catching some of 1H18’s contagion effects of high market volatility and foreign equity outflow. Nevertheless, there are interim trading opportunities amid easing domestic political risk and as earnings recover in 2Q18. While we generally advocate a defensive strategy with thematic focus on deep values, E&E and tourism, we also advocate a tradingoriented strategy that tactically focuses on overly sold-down large and mid caps.

WHAT’S NEW

Sticking to a defensive prescription. US-led external shocks and Pakatan Harapan’s (PH) surprising general election win caused several unexpected market seizures in 1H18. While we brace for further contagion effects of US-led global liquidity contraction (rising interest rates and reverse quantitative easing) in 2H18, the interim sentiment has turned overly bearish. Domestically, while policy statement vagaries remain a concern, we foresee ebbing political risk premium and earnings recovery in 2Q18, which suggest an eventual modest market recovery.

Strategy and investment themes. Thematically, deep values and asset monetisation, electrical and electronics (E&E) trend riders and tourism plays should outperform in 2H18. OVERWEIGHT the E&E-related, gaming and utility sectors, while the plantation sector offers refuge. While gaming duties may be revised up, we expect only a moderate earnings impact on the sector which trades well below mean valuations.

ACTION

End-18 FBMKLCI at 1,750 level. Our index target is our second downgrade for the year, post 1Q18 disappointing results season and after factoring in side-effect concerns of PH’s manifestos – business-unfriendly regulatory shifts – after the government followed up to pressure Telekom Malaysia (TM) to reduce broadband access fees. Our target index pegs the market at 14.9x 2019F earnings, or mean PE, the first time since 2014. The market remains volatile in the interim period, but we foresee a firmer market recovery in 4Q18. Market trough is seen at 1,650, or -0.5SD below mean.

Our top picks include large caps Bumi Armada, Genting Malaysia (GENM), Inari Amertron, Public Bank and Tenaga Nasional; mid caps Cahya Mata Sarawak, Scientex, Serba Dinamik and VS Industry; and small caps Gabungan AQRS and Yong Tai. Other notable BUY stocks include Malakoff, Globetronics and Magnum. We expect near-term re-rating catalysts for these stocks except GENM and Public Bank.

Tactically for portfolio boosters, focus on opportunities in heavily sold-down BUY-rated stocks: a) construction-related stocks including Gamuda, IJM Corporation and Malaysian Resources Corporation (MRCB); b) high yielders including Astro Malaysia (Astro); and c) selected mid caps eg Cahya Mata Sarawak, My E.G. Services (MyEG).

ESSENTIALS

Sweeping changes from GE14. The broad market tumbled following PH’s surprising win in GE14. PH, under the leadership of 92-year-old Tun Mahathir’s leadership, brought swift measures, including cancelling mega projects the Kuala Lumpur-Singapore High-Speed Rail (HSR) and MRT3, abolishing GST, and making sweeping changes in the leadership of government agencies and government-linked companies (GLC).

Maintaining a defensive stance in 2H18 amid external concerns, noting as well that global risk-taking may moderate with the impact of cumulative interest rate hikes and the Fed’s deleveraging in the US (refer to RHS table). Stick to lower-beta, larger-cap stocks.

Nevertheless, we foresee near-term trading opportunities as many stocks have not sufficiently recovered from the post-GE14 shock sell-down. Market valuations have turned too schizophrenic – bidding up many perceivedly safe haven and dependable growth stocks to stratospheric heights, while trampling down perceivedly vulnerable stocks to well under - 1SD mean valuations.

We continue to expect selected mid caps in our universe to outperform the market, as economic conditions continue to support these companies to deliver relatively attractive twoyear (2017-19) earnings CAGR of 13.5% vs the FBMKLCI’s 5.0%.

Key investment themes prescribed for 2H18 include: a) E&E trend riders, b) tourismrelated plays, c) M&A and asset monetisation, and d) deep value stocks. The first two themes relate to expected catalytic events in 2H18 (see event chart below). Notable deep value stocks include WCT, MRCB while notable high yield stocks include Astro and BST.

Source: UOB Kay Hian Research - 12 Jul 2018