• No respite in foreign outflow in KLCI. We have reviewed our prediction for a recovery in foreign inflow into Malaysian equity market in 2H19. We now think that large capitalisation stocks in the KLCI will not see a substantial improvement in net inflow than what was seen in the past 2 months (net combined inflow of approximately RM55m). As shown in Chart 1, there has been a high correlation between foreign flows and the KLCI. Total net foreign outflow from Malaysian equities has been RM4.7bn with only January and June posting net inflows. We now see the KLCI ending the year at 1,650 – an implied PE of 16x – versus our previous 1,750 target.

• US-China trade war is still a risk to markets. Global stocks suffered one of their worst week in 2019 as investor sentiment was hit by the announcement of new tariffs on imports from China. President Donald Trump said the US would impose a new 10% tariff on all remaining Chinese imports not currently facing duties—roughly USD300bn worth of goods. The announcement had caught markets by surprise. The US-China friction now poses a real and potent threat to global economy and financial markets.

• The USD is likely to stay firm, despite lower rates. Despite the start of possible new cycle of rate cuts, the USD has continued to remain firm against major currencies and emerging markets (EM) currencies. We think it may be slightly premature to expect the ringgit to outperform the USD at the moment, as Malaysia and global economy are also on rate softening mode. As it stands, the ringgit has actually weakened against the USD to RM4.18 (from RM4.12 previously) despite the US rate cut last week.

• The KLCI – best behind us, value is still in mid-caps. Apart from the 3 factors highlighted above, we think key constituent stocks, ie banks and energy-related, are likely to dampen the KLCI’s performance for the rest of the year on slower earnings growth amidst global and Malaysia’s GDP slowdown. We think the KLCI has probably seen its best performance for the year during the February and June periods when USD, crude oil price movements, and trade war deals were favourable to EM and Malaysia markets. We are still holding to our 2019 view for selective opportunities in mid-cap stocks, but are also mindful of their volatility.

Source: BIMB Securities Research - 5 Aug 2019