Summary

• We are positive on the outlook for the local equity market over the next 12–18 months. We project FBM KLCI’s earnings to grow by 5.8% and 7.0% in 2018F and 2019F respectively, underpinned by a GDP growth of 5.5% and 5.3% in each respective year. We maintain year-end targets of 1,900pts and 2,040pts in 2018F and 2019F respectively for the FBM KLCI, based on 18.5x 2018F and 2019F earnings respectively.

• However, we are mindful of various headwinds that could cap the upside of the market 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 (EM); (4) the structurally rich valuations of the Malaysian equity market; and (5) external risks such as escalating international trade tensions and the potential of a new EU existential crisis.

• We believe corporate Malaysia, especially regulated businesses, are generally facing higher policy and regulatory risks, as the new administration pushes for better deals for the rakyat as promised in its election manifesto. These rakyatcentric proposals include doubling the broadband speed at half the price, raising the minimum wage in the private sector, passenger service charges (PSC) at the airport to be determined in accordance with the quality of its facilities and expropriation of toll roads. To keep the living cost in check, the government has reintroduced fuel subsidy, while the electricity tariff for the domestic sector has been maintained for 2H18 despite the higher gas and coal costs.

• The US Fed has indicated the need to raise rates two more times in 2018, bringing the total rate hikes in 2018 to four times. We expect the US policy rate to normalise at 2.75%–3.00% in 2019 which implies two more 25bps hikes in 2019. Against a backdrop of rising US interest rates and a strengthening USD, outflows of funds from EM, including Malaysia, will persist. However, we believe 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-and-reward profile and valuation-to-growth matrix of EM become attractive again (after the recent selloff); and (3) if commodity prices stay firm, strengthening the finances of commodity-exporting EM.

• The abolishment of the 6% GST, reintroduction of petrol subsidy and capping of the electricity tariff for the domestic sector, coupled with the potential abolishment of highway tolls, are effectively putting more money back to the pockets of consumers. For exposure to consumer spending, we pick banks with strong consumer banking franchise (Public Bank and BIMB), apart from consumer/auto stocks (Berjaya Food, Power Root and Bermaz Auto). We like exporters that benefit from strong external demand (Top Glove, V.S. Industry and Inari Amertron). Against a backdrop of firm oil prices, we favour certain defensive oil & gas names (Yinson and Dialog).

Source: AmInvest Research - 4 Jul 2018