• Stocks were lacklustre coming into 4Q. Malaysia stocks were generally lower in September as large capitalisation stocks were pushed back on external-related risks. The KLCI declined 4% in the last month of 3Q2021 versus a significant gain of 6% seen in August. On YTD basis the KLCI remains a major underperformer versus the region and is down by 6.3% for the year. Coming into 4Q, investors remain lukewarm to the prospects of the traditional yearend euphoria.
• Corporate profit growth slowing amid easing in global economy. There are emerging signs that corporate profitability is facing headwinds in the coming quarters. Producer costs and consumer prices are seeing large divergences this year, suggesting that profit margins for some sectors are coming under pressure. The latest in global economy GDP growth, meanwhile is expected to grow at 4.9% in 2022 versus 4.4% estimated earlier according to the IMF, easing the margin pressure somewhat. We advocate exposure to the commodity sector as a way to mitigate businesses with significant margin compression.
• Foreign flows turning but still unconvincing. Malaysia has been at the end of foreign selling the past 2 years and the outflow has not abated despite inflows returning to the Asian region during the early part of this year. In August, the market saw net inflows of RM1.0bn, and this was followed by another RM740m in September. It is too early to predict that a revival in foreign flows is on the horizon as the KLCI is seeing an estimated growth of only 5.2% yoy for FY22; while the Hijrah Shariah (ex-banks) is expected to decline by 10.7% yoy.
• We remain positive on consumer-related themes, particularly commodities. We think that the headline KLCI may continue to disappoint as large capitalisation stocks come under selling pressure from local institutions as the year end approaches and lack of cyclical-based stocks. With this in view, we have recalibrated our KLCI year-end target to 1,650 from 1,700 – using long term average PE of 16.5x as our basis. We continue to favour plantation on unrelenting earnings momentum, oil & gas on recovery, plus trading opportunities on glove and construction stocks among others. Our tech recommendation is slated for longer term, as semiconductor stocks weakness may persist on cyclical peak demand concern, but global 5G acceleration provides support for certain sub-sectors.

Source: BIMB Securities Research - 6 Oct 2021