• The FBM KLCI has shrugged off a slew of negative news, reclaiming the key psychology 1,800pts support level during the week. At the last traded level of 1,810.87pts, the benchmark index has recovered close to 150pts from the low of 1,663.86pts (6 July 2018) and is only about 40pts shy of the pre-14th general election (GE14) level of 1,846.51pts (8 May 2018).

• The market has recouped lost ground from the selloff triggered by the turmoil in Turkey. More surprisingly, the market has emerged unscathed from the weaker-than-expected 2Q 2018 GDP growth announced by Bank Negara Malaysia (BNM).

• We held on to our end-2018 FBM KLCI target of 1,900pts in the aftermath of the GE14 (while our peers in the market jumped in to cut their targets) as we believed that the elevated market risk premium was a spike, and it should normalise as the new administration gradually started to provide greater clarity with regards to its policies.

• We have also held on to our end-2018 FBM KLCI target despite the marked deterioration in corporate earnings growth in 2018 and 2019 to 3.6% and 6.8% (from 5.8% and 7.0%), on the back of our downgrade of 2018 and 2019 GDP growth forecasts to 4.8–5.0% and 4.2–4.5% (from 5.5% and 5.3%).

• We are not perturbed by the high implied P/E of 19.5x for our 1,900pts end-2018 FBM KLCI target. This is because the implied P/E of 19.5x is based on our projected FBM KLCI earnings in 2018. By now (almost the ninth month into 2018), the market would have started to roll forward the earnings base year to 2019. Based on our projected FBM KLCI earnings in 2019, the implied P/E for our 1,900pts end-2018 FBM KLCI target is only at 18.3x, which is consistent with our medium-term target multiple for the FBM KLCI of 18.5x.

• Our simulation shows that from the current level of 1,810.87pts, it only takes the following key FBM KLCI component stocks to appreciate by the simulated levels as follows in order for the FBM KLCI to hit 1,900pts: Maybank (+RM1.50), Public Bank (+RM2.20), Tenaga (+RM1.50), CIMB (+RM1.00), IHH (+RM0.80) and Axiata (+RM0.80).

• We see trading opportunities in Maybank, Public Bank, Tenaga, CIMB, IHH and Axiata during this mini rally in the local market led largely by large-cap and FBM KLCI-linked stocks. Apart from sound fundamentals, these stocks offer high share liquidity and have attracted significant foreign participation historically. They could potentially overshoot our fair valuations. We expect short-term outperformance from these stocks vs. the market as a whole.

Source: AmInvest Research - 24 Aug 2018