• Sustained economic growth: We expect continued economic expansion for Malaysia to support domestic equities.

• Economic growth to spill-over to earnings: We expect another meaningful recovery in KLCI earnings following turnaround in profit growth in 2017.

• Valuation gap versus region has narrowed: The KLCI is still an underperformer, while the MSCI Asia ex-Japan has continued higher, while risk appetite has risen.

• Rising commodity prices and ringgit: We expect better commodity prices – oil and industrial metals, a rising ringgit, lesser volatility in outflows to play out this year.

• Key risk: Policy uncertainty is still a concern, i.e. US regulatory and fiscal policies, and possible trade restrictions. A faster-than-expected China slowdown would pose risk to the entire region.

• We predict the KLCI to challenge its record high of 2014. End-2018 KLCI target is 1,900.

Convincing start suggests another good year in 2018

Risk appetite has increased materially during the early period of the year. Despite an underperforming KLCI in 2017 – the MSCI AC World Index and MSCI AC Asia ex-Japan index rose by a spectacular 28% and 39% respectively – Malaysian equities in general have been relatively vibrant the past several months. This is on the backdrop of a bullish environment for emerging markets, which was supported by a synchronised economic growth and low inflation in industrialized countries. Consequently, the conducive environment has helped to prop up valuations in equities across the Asian region. There are good reasons to be optimistic on the stock market again this year – particularly in 1Q18 – as the macro setting and equity-related fundamentals remain favourable. There has been a stark contrast in fundamentals that are expected to drive Malaysian equities in 2018 against a year ago.

• The ringgit is near a 3-year high against the USD. We started 2017 with the ringgit at near record lows following a huge outflow in the debt market.

• There was a significant foreign inflow in the past 4 weeks of approximately RM1bn against a net outflow of RM367m during the same period a year ago.

• Corporate earnings in general rose as expected in 2017, but there has been surprises on the upside in export-oriented sectors such as technology and rubber gloves.

• Oil prices are trending higher currently as Brent heads to USD70 per barrel.

With the KLCI now firmly above 1,800, we believe the index is poised to experience a breakout year in 2018. From our sectoral analysis, 9 of the 16 sectors which we track have outperformed the KLCI – ringing in returns above 10% in 2017 (refer chart below). Not surprisingly, these outperformers include technology, rubber gloves and construction, while telcos and utilities underperformed the index. On the surprise side are auto (led by DRB) and oil-related stocks (led by refiners and retailers) which posted strong gains following a poor year in 2016. For 2018, we expect large cap stocks in utilities and telcos sectors – as value stocks –may perform better as foreign funds flow into these stocks and profit margins stay relatively stable.

Plantation, healthcare and property sectors’ performance was well below the KLCI’s in 2017. We do not expect this to change. These 3 sectors are likely to continue underperforming the market in 2018 as earnings growth is relatively unexciting while key risks such as rising costs that will pressure margins, and weak demand remain in play.

Against this backdrop, our key themes for the market for 2018 are:

1. continued expansion in GDP – we recommend Tenaga Nasional

2. rising commodities, led by crude oil and industrial metals – Buy Petronas Chemicals

3. digitalisation of the economy – MyEg Services is our preferred choice

4. robust growth in private consumption – we still like selective consumer stocks on market weakness however.

5. elevated multiples in dominant sectors/companies – rubber gloves and technology are still our preferred choice in this space.

Source: BIMB Securities Research - 11 Jan 2018