Investment Highlights

• We maintain our HOLD call on FTSE Bursa Malaysia KLCI exchange-traded fund (FBM KLCI ETF) and fine-tune our FV to RM2.01 (from RM2.02) (Exhibit 4). Our FV is based on our fair values (for stocks under our coverage), consensus fair values (for stocks not under our active coverage) and last traded price (for Hap Seng Consolidated, which is not under any coverage). It is at a 13.5% premium to its NAV of RM1.77 (Exhibit 3).

• During the semi-annual review on the FBM KLCI in May 2018, the index providers FTSE Russell and Bursa Malaysia decided to remove three constituents, namely, YTL Corp, AMMB Holdings and Astro Malaysia, and replace them with Hartalega Holdings, Malaysia Airports and Dialog Group, with effect from 18 June 2018. We are reflecting these changes in our revised valuation.

• We are positive on the outlook for the FBM KLCI. We project the FBM KLCI’s earnings to grow by 5.7% and 7.0% in 2018 and 2019 (Exhibit 2), underpinned by a GDP growth of 5.5% and 5.3% respectively. We have year-end targets of 1,900pts and 2,040pts in 2018 and 2019 for the FBM KLCI, based on 18.5x 2018F and 2019F earnings respectively. This is at a 1.5x multiple premium to the 5- year historical average of about 17x, largely to reflect: (1) the cyclical upturn in corporate earnings growth; and (2) the introduction of largely high P/E stocks during the recent round of changes to the FBM KLCI constituents, i.e. Press Metal, Nestle, Dialog Group, Hartalega Holdings and Malaysia Airports.

• However, we are mindful of various headwinds that could cap the upside of the FBM KLCI including: (1) an elevated market risk premium while the new administration rolls out its new policies; (2) the US Fed that has turned a tad hawkish; (3) persistent outflows of funds from emerging markets; (4) the structurally rich valuations of the Malaysian equity market against its regional and global peers; and (5) external risks such as escalating international trade tensions and the potential of a new EU existential crisis.

• We hold the view that investors’ sentiment towards emerging markets will improve at some point: (1) when the market feels that the US rate hike cycle and the USD upcycle are about to taper off; (2) when the risk-andreward profile and valuation-to-growth matrix of emerging markets become attractive again (after the recent selloff); and (3) if commodity prices stay firm, strengthening the finances of commodity-exporting emerging markets.

Source: AmInvest Research - 26 Jun 2018