• The KLCI was weaker for the week at 1,669.45, down 13 points versus the prior week.

• Foreigners bought shares on a net basis for the 4th straight week, albeit lower at RM84.9m compared to RM230.2m a week before. Local retail recovered from net sell position of -RM22.5m to RM84.6m last week.

• Foreign funds’ net participation YTD is at -RM4.4bn against -RM7.3bn during the same period a year ago.

• Although the KLCI is -1.3% YTD, the FBM Emas (+2.8%) and FBM70 (+13.8%) remained positive YTD.

• Friday’s selling may have lingering effect on the KLCI this week. However we expect investors to reset focus on the ringgit and US rate cut – all are positives.

Net foreign inflow for the 4th straight week

The KLCI ended lower for the week as CIMB and bank shares dragged the index lower on Friday, resulting in a net outflow of RM129m during the day. CIMB shares fell by 2.6% to RM5.20 on Friday on news that Khazanah is seeking USD500m of zero coupon bonds (maturity 2024) exchangeable into ordinary CIMB shares.

On the macro front, BNM maintained its OPR at 3.0% but warned that the baseline GDP projection is subject to downside risks from ongoing uncertainties in the global and domestic environment, worsening trade tensions and extended weakness in commodity-related sectors Brent crude oil rose by 3.6% at USD66.52/b after EIA announced US crude oil stockpiles fell by 9.5mi barrels for the week ending 5th July.

The ringgit continued its gradual climb ending the week higher at RM4.115 versus USD against the backdrop of a possible cut in US rates later this month.

Stocks’ outlook remains favourable near-term

Despite the decline Friday, the outlook for Malaysian equities remains constructive in our view. In the near-term we think sentiment will continue to be boosted by a rising ringgit, a US rates cut and truce in US-China trade war. However, the risk of tariffs and other forms of retaliation still exists, and the potential for further escalation remains high, in our opinion. Another risk to the market is weak economic data, validating slowing GDP growth globally.

The KLCI versus rest of the Malaysian market

Over the last few weeks, the KLCI continued to swing between small positive and negative return YTD. Latest as at Friday, the KLCI is down by 1.3% for the year, closing the week at 1,669 points. We retain our KLCI year-end target of 1,750 implying a PE ratio of 17x on FY19 earnings.

As the KLCI is represented by 30 stocks, the index can, more often than not, provide an erroneous way of looking at the Malaysian market. A valid case in point is the performance of the Emas and FBM Mid70 which have well outperformed the KLCI (refer Table 3) this year and the last 1 year. It is a well-known fact that majority of the KLCI component stocks are heavily owned by government-owned funds, i.e Khazanah and PNB for strategic purpose, which create 1) high valuation and 2) relatively low free-float for these stocks.

Source: BIMB Securities Research - 15 Jul 2019