• It may have started off slow, but the 4Q reporting season ended a little more upbeat. Corporate Malaysia delivered a set of 4Q2017 results (Exhibit 1) that was generally encouraging, with 24%, 49% and 27% 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 were fairly consistent with the previous quarter, with "above", "within" and "below" at 14%, 45% and 41% respectively, as compared with 14%, 43% and 43% in 3Q2017.

• A number of FBM KLCI Index-linked heavyweights surprised to the upside; they were Maybank (lower loan loss provisions), Hong Leong Bank (higher net interest incomes, lower provisions and strong performance from Bank of Chengdu), Genting Malaysia (better luck factor and higher mass market volume), IOI Corporation (strong performance from the manufacturing division) and Axiata (higher revenues and margins from its Sri Lankan operations).

• On the other hand, Genting Bhd disappointed due to impairment on a life sciences business, while IHH was weighed down by start-up losses at Gleneagles Hong Kong. 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 7.3% from 8.2%

• After reflecting the actual reported numbers, FBM KLCI earnings growth for 2017 is now estimated at 5.7% vs. our previous projection of 3.8%.

• On the other hand, due to the higher base in 2017, our FBM KLCI earnings growth rate for 2018F has been revised down to 7.3% (from 8.2%) (Exhibit 2).

• Meanwhile, in terms of earnings growth numbers of "all sectors" – a broader but slightly more volatile earnings gauge encompassing the entire universe of our stock coverage – the growth rate for 2017 is now estimated at 2.4% (vs. our previous projection of 2.2%) while the growth rate for 2018F is now projected at 11.3% (from 17.6% previously) (also see Exhibit 2).

We remain positive on the market

• With no major surprises from the 4Q2017 reporting season, 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, piling 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 - 2 Mar 2018