News

• Deputy Governor Datuk Muhammad Ibrahim (MI) has been appointed as the new chief of BNM effective 1 May.

Comment

• We are positive on the appointment of Datuk MI as it will ensure continuity of BNM policies in the challenging economic environment.
• On monetary policy (MP), we expect Datuk MI to uphold the philosophy left behind by Tan Sri Dr. Zeti, that is to achieve medium-term sustainable growth with price stability. We expect no change to the MP framework, i.e. interest rates are tailored solely for domestic considerations (growth & inflation) and not for exchange rates.
• We continue to expect BNM keeping the OPR steady at 3.25% throughout 2016. We opine that the pace of GDP slowdown does not warrant an imminent OPR cut. We expect BNM to wait for measures to support disposable income to take effect (EPF contribution rate cut, tax relief, civil servant pay rise & minimum wage hike).
• We also expect Datuk MI to continue advocating financial stability to safeguard soundness of the financial system. In this regard, we expect measures on the property sector (i.e. LTV & DIBS ban) and responsible lending guidelines to be upheld during Datuk MI’s stewardship.
• On FX policy, we expect BNM to maintain existing strategy, i.e. leaving a free hand while intervening to smooth out volatility. We keep our ringgit year-end forecast at RM3.80- 4.00/US$, but expect ringgit to experience weakening bias to above RM4.00/US$ in the near term on macro concerns.
• For the banking sector, we maintain our neutral call, with earnings supported by a stable macro environment amid likelihood of an unchanged lending policy. Top picks for the sector are Maybank (TP: RM9.82) and RHB (TP: RM6.96).
• We also maintain our neutral stance on the property sector. With the appointment of internal successor, we expect speculation of potential relaxation of property measures to fizzle out. Top picks for the sector are Matrix (TP: RM2.91) and IOIPG (TP: RM2.77).

Target

• Maintain our end-2016 FBM KLCI target at 1,760 based on 15.0x one-year forward earnings.

Strategy

• No change to our strategy given expectation of monetary policy continuity.
• However, we still expect market sentiment to remain cautious, with looming deadline (2 May) for IPIC (guarantor of 1MDB bond) to honour the US$50m interest payment. We also understand that there is another interest payment of US$52.4m due 11 May on a separate 1MDB bond.
• We advocate defensive stance in larger cap stocks with earnings certainty and re-rating catalysts to weather market volatility.
• Construction a still a safe and clear winner with expectation of continued strong flow of contract awards in 2Q.
• Top picks remain unchanged (Figure #3).

Source: Hong Leong Investment Bank Research - 28 Apr 2016