• Foreign outflow again dictated the market. The KLCI reversed trend to rise to 1,612 points as US-China trade talks hopes lifted sentiment last week. Recall that the KLCI had stayed mostly below 1,600 level during the past 2 weeks as net foreign outflow depressed share prices. Selling by foreign funds continued at a slower RM324m during the week (Table 3). The market has now suffered a net foreign outflow for 7 straight weeks dating back to midJuly (week 29).

• The latest escalation in US-China trade war. Last week’s optimism on trade talks was overturned on 1 September, when both the US and China began imposing new tariffs on each other’s exports. The Chinese government went ahead with increased duties of between 5% and 10% on a variety of major American goods exported to China, including soybeans and crude oil. Meanwhile, all USD550bn worth of Chinese exports to the US are set to be subject to duties when another round is implemented in December.

• Corporate earnings gloom persists. As alluded to in our previous report, the impact of a stronger 2Q GDP (released in mid-August) was not seen on KLCI companies’ earnings. Malaysia’s GDP in recent quarters was driven by higher household spending and private investment, which only has small direct representation in the KLCI via the consumer/gaming sector, ie Nestle, PPB Group and Genting. The 2019 aggregate earnings growth estimate for the KLCI is pared to only 0.4% yoy (Chart 1). However, it is interesting to note that the estimates for aggregate 2020 earnings is +7.8% yoy, which could be subject to further downgrade, in our view.

• KLCI upside undone by earnings and foreign flows. The KLCI is down 4.6% YTD, while FBM Emas is -1.9%. On a shorter 1-month period however, Malaysian equities have outperformed the region (Table 1), which we think is a reflection of local funds’ support. The weaker performance for KLCI YTD is mainly due to banking stocks, primarily Maybank, CIMB, Public, and HLB, which are all down by >10% for the year. We see no significant event revitalising the KLCI meaningfully this year, as earnings remain at risk of downgrades, whilst outlook for foreign flows remain negative. We maintain our year-end KLCI target of 1.650.

Source: BIMB Securities Research - 3 Sept 2019