Stockpicks for 2017

WHAT does 2017 hold for the FBM KLCI?

Malaysian investors have had a rough ride.

It’s been three years of consecutive declines for Bursa Malaysia. Besides the lacklustre equity market, the weakening ringgit and oil prices have not been spared.

The ringgit retreated to its 14-month low against the US dollar, lingering at the 4.47 level on prospects of further US interest rate rises next year. Not helping the situation were the oil prices, which stagnated at the US$45 levels for the better part of 2016. Globally, there were black swan events like Brexit and Donald Trump’s victory as US president, which further rattled the market.

It’s been shocks and speed bumps all year round. Will the misery come to an end? Areca Capital chief executive officer Danny Wong is, however, positioning for a rebound.

“We think that the domestic market has priced in a lot of negative events. The downside should be rather limited. We are optimistic about 2017. There is always sunshine after the rain,” he says.

Wong says that 2016 turned out to be another challenging year, while meaningful market recovery failed to gain traction.

“For 2014, 2015 and 2016 year-todate, the local index has declined -5.66%, -3.90% and -3.68%, respectively, or a cumulative loss of 12.68% since 2014,” says Wong.

Nonetheless, indicators are pointing towards a better 2017 and he foresees long-term investors accumulating in advance.

UOB Kay Hian Research head Vincent Khoo is also seeing opportunity amid the bleakness.

“Yes, 2017 remains a challenging year for emerging-market equities amid rising US interest rates, and growing protectionism in the western world, while the global economic growth prospects remain lacklustre. On the home front, the ringgit continues to be besieged by a major confidence issue.

“Nevertheless, the FBM KLCI should deliver some excitement in the first-half of 2017, led by a firmer ringgit outlook, investors pricing in a potential general election (GE), and a modest realignment of corporate earnings growth to gross domestic product growth, after four consecutive years of earnings contractions,” says Khoo.

MIDF Amanah Investment director of corporate investment banking Sherilyn Foong is also more positive on the market.

She says that most people forget that the real economy and the stock market are different animals.

“The stock market is forward-looking and is prone to swings of exuberance to either side, hence, the often-used phrase ‘fear versus greed’.

“While signs are pointing to a tough year ahead, emerging data supporting a resilient and well-diversified Malaysian economy, especially when compared with the Asian crisis, could mean an unexpected stock market rebound spurred by unique local catalysts.”

She says that 2017 is going to be a stock-picking year. “Initial public offerings (IPOs) are a segment to watch and be invested in,” she says.

Several signs

Areca’s Wong says there are a few factors that support the case for a turnaround in the Malaysian economy.

“There are signs of corporate earnings having bottomed out after many quarters of decline with cost-rationalisation efforts. Consumer sentiment as measured by the Malaysian Institute of Economic Research has also bounced off its lows.”

Wong says that cashed-up local institutional funds are primed to deploy their cash after the certainty of the Trump election and US rate hikes.

“There are heightened expectations that the 14th GE will be in 2017. Potential election spending may benefit certain stocks. There are also expectations that 2017 will be a turnaround year for new issuances, IPOs and mergers and acquisitions of some big conglomerates and Government-linked companies,” he says.

Kenanga Investment head of research Chan Ken Yew, meanwhile, says that the market is likely to be volatile in view of the more aggressive rate hike decision in the US.

“The policy and direction of the Trump presidency could spark more uncertainties. The good news, however, could be the emergence of the GE theme play, which could uphold the local equity market’s investment sentiment. In short, we reckon that 2017 will be another range-bound year,” he says.

Chan adds that the play on Bursa Malaysia will not be broad-based and most likely be stock-specific.

Khoo thinks that the FBM KLCI could stretch to the 1,750 to 1,800point level in the first half, before easing back to the 1,730-point level at end-2017, as investors refocus on Malaysia’s subdued long-term economic and corporate earnings trends.

The year-end 2017 target still implies a valuation premium to the historical mean price earnings multiple of 14.7 times, after taking into account ample domestic liquidity.

Khoo says that should even the US 10-year treasury yield rise to 3%, he foresees a relatively benign global interest rate climate, inclusive of the key European countries’ long-term Government bond yields.

“Effectively, subdued global economic growth prospects would eventually mitigate the current uptrend inflationary pressures,” says Khoo.

More importantly, Khoo does not foresee heavy portfolio outflows from Malaysian Government Securities (MGS), as most of the short-term investors have probably sold down their holdings. The foreign holdings of MGS is equivalent to about 45% of Malaysia’s foreign reserves.

“The long-term foreign investors continue to like the MGS’ high rate relative to the sovereign bond rates in the advanced economies,” he says.

Khoo’s expectations for a firmer ringgit, which is an important market rerating catalyst, reflects the sustained recovery of crude oil prices to the US$55-per-barrel range, following production cuts by the Organisation of the Petroleum Exporting Countries (Opec) and key non-Opec producers, and Bank Negara’s recent requirement for exporters to effectively retain a substantial proportion of export proceeds in ringgit.

“This scenario relieves pressure on Malaysia’s fiscal deficit and helps preserve the country’s foreign-currency reserves. Eventually, we foresee some confidence returning on the currency front, benefitting from the cumulative effect of Malaysian exporters’ forced repatriation.

“Second is the acceptance that today’s form of capital controls would not degenerate and extend to foreign portfolio funds, and thirdly, Malaysian banks providing adequate facilitation for US-dollar hedging for both the real economy and capital markets,” explains Khoo.

While Wong feels the ringgit will likely remain volatile, there are a few catalysts that could rerate it upwards.

Firstly, the ringgit has decoupled from oil prices, and if it starts moving in tandem with crude oil again, it should be poised for a sharp recovery.

Also, Prime Minister Datuk Seri Najib Tun Razak’s visit to China has resulted in projects close to RM143bil being signed. The RM55bil East Coast Rail Line, set to be built and financed by China, is also expected to start next year.

From Bank Negara’s foreign-exchange measures, analysts estimate that there could be around RM90bil held by local exporters in foreign currency. The conversion of such funds will bolster the country’s foreign reserves. Bank Negara’s international reserves stand at RM405.5bil.

Investment themes

Areca’s Wong maintains an “overweight” call on big caps and high-dividend yielders.

“We see even more value emerging after Trump’s victory and rate hike sell-offs. We are positioning ourselves for a market rebound,” he says.

Investment strategy-wise, Khoo advocates a trading strategy as he foresees a choppy equity market, given the many geo-political events. He continues to be partial to selected small mid-caps.

Investment themes in 2017 include infra and building material plays, electrical and electronics trend riders, quality dividend plays and GE picks.

Khoo is overweight on the construction, building materials, electrical and electronics, and utilities sectors. He also sees selective outperformers within the rubber glove and real estate investment trust or Reit sectors. “However, we continue to be underweight on cyclical sectors such as automotive. The outlook for the property sector remains subdued. We are market weight on the oil and gas (O&G) sector, as the

recovery in crude oil prices would still not rekindle or accelerate most of the shelved or deferred O&G projects in Malaysia. Nonetheless, higher oil prices should rerate some overly depressed O&G stocks,”

Khoo’s top picks include largecaps such as BIMB Holdings Bhd, Gamuda Bhd, Genting Bhd and Tenaga Nasional Bhd. For the small caps, he likes Ann Joo Resources Bhd, Bumi Armada Bhd, Hume Industries Bhd, Kerjaya Prospek Group Bhd, Kim Loong Resources Bhd, MRCB Quill Bhd and VS Industry Bhd.

Meanwhile, Kenanga’s Chan likes the plastic packaging segment. In general, he likes players such as Scientex Bhd, SLP Resources Bhd and SCGM Bhd.

“We are also positioning ourselves for the O&G sector and plantations, in particular when crude oil and crude palm oil prices become more sustainable. We are also looking at some yield stocks and stocks that were heavily sold down by foreign investors recently, for example, the telco sector,” he says.

Chan is still cautious on the property sector, given the tighter liquidity and credit lending.

Nonetheless, he likes affordable housing developers like Matrix Concepts Holdings Bhd. For the O&G sector, apart from sustained oil prices, Chan will only turn more optimistic should Petroliam Nasional Bhd start to revise its capital expenditure.