• At about midway through the 4Q2017 reporting season (40% of our stock universe having reported), corporate earnings have thus far been relatively uneventful (Exhibit 1) – with 15%, 66% and 19% beating, meeting and missing our projections respectively. This compares with 18%, 51% and 31% for "above", "within" and "below" respectively in 3Q2017.

• Against the market consensus, the numbers have thus far been equally unremarkable with "above", "within" and "below" at 15%, 45% and 40% respectively, as compared with 14%, 43% and 43% in 3Q2017.

• Thus far, only one FBM KLCI Index-linked heavyweight has surprised to the upside, namely, Axiata thanks to higher revenues and margins from its Sri Lankan operations. We have raised Axiata's FY18-19F earnings by 6-10% to reflect this. In the meantime, while Petronas Chemicals and MISC met our forecasts, we have moderated earnings projections to reflect a higher effective tax rate for the former, and lower tanker rates for the latter.

FBM KLCI 2018 earnings growth moderated to 7.0% from 8.2%

• After factoring in the earnings changes thus far, our FBM KLCI earnings growth forecast for 2017F has been revised to 4.2% (from 3.8%), while 2018F has been adjusted to 7.0% (from 8.2%) (Exhibit 2). The lower 2018F FBM KLCI earnings growth is partially due to a higher base in FY17F.

• Meanwhile, in terms of earnings growth forecasts of "all sectors" – a broader but slightly more volatile earnings gauge encompassing the entire universe of our stock coverage – the numbers for 2017F and 2018F have been adjusted to 1.7% and 11.9%, from 2.2% and 17.6% previously (also see Exhibit 2).

We remain positive on the market

• With no major surprises from the 4Q2017 reporting season so far, we maintain our end-2018 KLCI target of 1,900pts, based on 18x 2018F earnings, at a 1.5x multiple premium to the 5-year historical average of about 16.5x.

• We acknowledge that the risk and reward balance for investing in Malaysian equities has become less compelling at present vs. during the start of the year following: (1) the strong run-up in the market in the recent months (that has significantly reduced the upside); and (2) the return of volatility to the global markets, as the premise for the "riskon" trade, i.e. a mild and gradual rate hike cycle in developed economies, may no longer hold if inflation surprises to the upside.

• Nonetheless, as it stands now, we maintain our base case that the "risk-on" trade will still prevail in 2018 which means investors will continue to put more money to work, and they will pile more money into equities vs. bonds, against a backdrop of rising interest rates and a synchronised recovery in the global economy. Meanwhile, emerging markets will continue to attract inflows, to both equities and bonds, backed by attractive valuation-to-growth matrix vs. developed markets, coupled with firm commodity prices.

• Against a backdrop of a cyclical upturn in corporate earnings, we believe cyclical sectors will start to outperform the broader market, i.e. financial services, property and consumer discretionary. We also like certain large-cap names with strong earnings resilience in the construction and power space. Small- and mid-cap stocks could be in the limelight thanks to the government's mandates to GLC funds to invest more aggressively in this space.

• Our top Buys and Dividend Picks are reflected in Exhibits 3 & 4.

Source: AmInvest Research - 27 Feb 2018