Outlook

• Adapting to new normals. After a volatile 2015, the global economy will adapt to suppressed commodity prices, slower China growth and Fed rate hike cycle. Global growth is projected to recover slightly to 3.4% but still below trend.
• Lackluster growth ... Malaysia will grow at a slower pace of 4.5% in 2016, affected by weaker consumer spending but supported by a reacceleration in infrastructure spending. We expect BNM to leave OPR unchanged throughout 2016.
• ... but less concern on oil impact. Low oil price is giving lesser problem to both fiscal space and current account, due to strong GST revenue and export boost from weak MYR.
• Market to remain subdued in 1H16. Global energy market is still struggling with oil oversupply situation. Investors will also have to stomach further Fed rate hikes (HLIB: 4 hikes of 25bps each) while China continues to fine-tune its growth model. Locally, Zeti’s succession, growth moderation and negative real interest rate will be key headwinds for market.
• Better 2H16. Better clarity on oil market dynamics (Iran sanction lifting in Feb-16), new BNM governor (Apr-16) and normalization of GST impact will aid a recovery in MYR (HLIB: RM3.80-4.00/US$) and investors’ appetite.
• Mild recovery in earnings. FBM KLCI earnings to recover mildly in 2016 (+6.3%) and 2017 (+6.5%) after several years of disappointment.
• Setting stage for return of foreigners. Despite challenges of low energy prices, Malaysia’s economic fundamentals and sovereign ratings have remained resilient. Undervalued MYR provides another a basis for return of foreign interest.

Target

• End-2016 FBM KLCI target at 1,820 based on 15.5x (historical mean) one-year forward earnings.

Risk

• Global – crude oil volatility, sharp China slowdown & aggressive Fed rate hikes.
• Malaysia – Zeti’s succession & prolonged erosion in consumer sentiments.

Strategy

• Defensive in 1H16. We advocate slight defensive stance in larger cap space in most of 1H16 to ride through volatility and to capitalize on deployment of Valuecap funds. Stay invested in export theme particularly quality export stocks that will deliver growth in the absence of strong US$ catalyst .
• Position for foreigners’ return in 2H16. Usual darlings of foreign funds with higher beta (i.e. Airasia, CIMB, Digi, IOI Corp, SKPetro) will be under the radar.
• Construction a clear winner. We anticipate a record contract awards in 2016 (11MP & Sarawak election).
• Three major themes. Our stock selections are based on (i) resilient and/or visible earnings growth; 2) high yield with defendable earnings; and 3) quality export stocks.
• Top picks (in alphabetical order) are Axiata, Digi, Edgenta, Evergreen, IJM, Inari, Maybank, Mitrajaya, SunCon & TNB.

Source: Hong Leong Investment Bank Research - 5 Jan 2016