• Foreign outflow again dictated the market. The KLCI rose slightly during the week to 1,571 points as US-China trade talks hopes again lifted sentiment. Month-to-date December the KLCI saw gains of around 10 points. Recall that the KLCI had stayed mostly below 1,600 level during the past 4 weeks as net foreign outflow depressed share prices. Selling by foreign funds continued at a slower RM367m during the week (Table 2). The market has now suffered a net foreign outflow of RM11.1bn (week 50), matching the amount seen during the same period of 2018.
• Global stocks and yields, on another US-China deal hope. Global stocks rebounded after US senior officials released a statement announcing that the US would lower the tariff rate on about USD120bn in Chinese goods from 15% to 7.5% while cancelling the upcoming tariffs on nearly USD160bn in largely consumer-related imports from China as part of an initial trade deal. The US markets continued their impressive run to yet another record high, with the S&P 500 currently up by 26% YTD, whilst MSCI EM has gained 11%. Bond yields rose – the US 10-yr Treasury is now up at 1.8%.
• Corporate earnings FY19 likely negative, recovery in 2020. The 2019 aggregate earnings estimate for the KLCI is now - 0.4% yoy (Chart 1). However, it is interesting to note that the estimates for aggregate 2020 earnings is at +6.6% yoy for the KLCI and 10.4% for FBM Hijrah Shariah. As seen in the last 2 years, earnings growth expectation for the 2 major indexes has turned out to be unrealistic, disappointing the market.
• KLCI performance undone by domestic issues and foreign flows. The KLCI is down 7% YTD, while FBM Emas has declined approximately 3%. On a 1-month period, the KLCI has continued to see underperformance against the region (Table 1), which is a reflection of foreign funds’ negative view on large stocks, i.e earnings, politics. The weaker performance for KLCI YTD is mainly driven by banking stocks, primarily Maybank. Nonetheless, several mid-tosmall capitalisation stocks have done extremely well as local support remains focused on continued earnings growth and corporate actions, in our view. We retain our buying preference on mid-cap stocks versus large caps. We expect a slight upside for the KLCI in 2020, within a range of 1,650-1,700 depending on how domestic risks pan out.

Source: BIMB Securities Research - 16 Dec 2019