News

The FOMC decided to start trimming its monthly bondbuying programme by US$10bn to US$75bn a month in Jan 2014. Both the purchase of long-term Treasury bond purchases and mortgage-backed securities will be reduced by US$5bn to US$40bn and US$35bn a month respectively.

The Fed Chairman Bernanke said the mild tapering reflects the cumulative progress and an improved outlook for the job market.

Bernanke also said future tapering will be data dependent, and similar QE trim can be expected at each FOMC meeting if there is progress in terms of inflation and continued job gains.

On interest rates, the FOMC reiterated that the Fed Fund rate will stay low even if unemployment rate declines below 6.5%, “especially if projected inflation continues to run below the Fed’s 2% goal”.

Bernanke said the decision to taper the QE pace was fully supported by the FOMC members (9 out of 10 votes) as well as by the incoming Fed chief Janet Yellen.

Comments

We had earlier expected that Fed tapering would be mild. Going forward, we maintain our expectation of a mild QE reduction of US$10-15bn/quarter. We believe the global economy and financial markets are now in a stronger position to face the adjustment of slower pace of liquidity injection.

We expect optimism on the global economy will prevail, and investors are likely to take the Fed mild tapering decision to signify higher certainty of growth outlook while being reassured of low interest rates environment.

On the macro front, we expect macro risks to diminish into 2014 with global growth picking up to 3.6% with synchronised growth among major economies. Real GDP growth to pick up slightly to 5.0% in 2014 as stronger net exports offset slower domestic demand growth.

We see limited impact of outflow pressure from “US noises” (i.e. Fed tapering & debt ceiling). Malaysia is a low Beta market given relatively large fund management industry, lower foreign shareholding (close to trough), recent foreign selldown well absorbed, FBM KLCI P/E premium valuation vs. peers at 5-year average, less volatility and low Beta vs. MSCI Asia ex-Japan.

We expect earnings growth (2013-2015 at 4.5%, 10.6% and 7.4%, respectively) to take the FBM KLCI to 1,910 (pegged at historical mean P/E valuation of 14.71x).

Prefer stock specific selection on those who stand out among peers and have individual catalyst(s). Focus on growth and budget beneficiaries as well as reforms or structural changes and interest rate hike.

Our top pick for 2014 consist of Brahim’s, DRB, GenT, IJM Corp, Maybank, Matrix, Pharmaniaga, Scomies, Sunway, Tenaga and TM (our report entitled 2014 Outlook & Strategy dated 10 Dec 2013).

Source:Hong Leong Investment Bank Research - 19 Dec 2013