Highlights

• PM Datuk Seri Najib Tun Razak yesterday announced immediate measures to help tackle the issues of China’s economic downturn and unexpected yuan devaluation, falling commodity prices and tumbling ringgit. All the measures unveiled were aimed at: (i) stabilizing the financial market; (ii) assisting household expenses; and (iii) assisting local business activities (refer to Figure #1).
• PM also assured 2015 GDP growth of 4.5-5.5% and continued growth in 2016. Fiscal deficit reduction on track (3.2% of GDP) while 97% of government debt is in ringgit.
• No intention to intervene and introduce capital controls while further economic measures will be in the 2016 Budget .

Implication to the economy / market

• We are overall positive on the Government’s commitment to stabilize stock market and safeguard economic growth.
• Out of all the measures announced, the most direct impact is fund allocation of RM20bn to Valuecap, which represents circa 2.0% of FBM KLCI and 1.2% of total market capitalization. Cumulative foreign outflows since the peak of FBM KLCI in June 2014 amounted to RM20.9bn.
• On economy, measures unveiled have limited impact on GDP growth and government’s finance positions.
• Sector beneficiaries: 1) construction as mega projects expected to be given priority; 2) tourism related (transport and consumer); 3) selected companies in education and healthcare; and 4) property but outlook still cloudy.
• This would expedite our expectation of switch in focus to values big caps (albeit yesterday’s surge).
• Repatriation of GLCs funds could result in more stable MYR, culminating in lower appetite for export oriented stocks.

Strategy

• After stellar FBM KLCI performance yesterday, attention will revert to immediate external issues (FOMC meeting on 16-17 Sep and developments in China). Thus, investors may still have to continue endure volatility, at least in the short-term.
• Nevertheless, FBM KLCI’s P/E is at circa 0.9SD below mean and P/B circa 1.5SD below mean. Both P/E and P/B premium valuations vs. peers are near 0.5-1SD below mean.
• Coupled with RM20bn Valuecap fund, we still expect modest normalization of valuation closer to mean towards year-end. Thus, maintain our FBM KLCI year-end target at 1,710, based on 15x (or circa 0.5SD below mean) 2016 earnings.
• Slight change in focus themes: 1) increase attention on values big caps (Axiata, Digi, IJM, Maybank and TNB); 2) continued preference for 11MP (including RAPID) play (Edgenta, KNM and Mitrajaya); and 3) reduce focus on export oriented (Inari but excluded Evergreen and Homeritz).
• Other big caps BUY ratings: Astro (TP: RM3.56); Gamuda (TP: RM5.01); Genting (TP: RM8.79), RHB Cap (TP: RM7.53); and Westport (TP: RM5.35).

Source: Hong Leong Investment Bank Research - 15 Sep 2015