News

• The UK had voted to leave the European Union.

Comment

• Short-term impact of Brexit is broadly established, mainly centred along a recession scenario in the UK. The IMF had earlier assessed that the UK GDP will be lowered by 1.4ppts by 2019 (negotiation to similar EU status) and by 5.6ppts by 2019 (if default to WTO trade rules). Global growth will be dampened by circa 0.1ppt (UK = 2.4% of global GDP).

• While the dust has settled, long-term implications of Brexit are still largely unknown. In our opinion, long-term risk of Brexit is the setting of dangerous precedence of (i) nationalism and (ii) populist revolt against establishment. This may lead to unpredictable global economic policies and political developments. We also expect sentiment of populist revolt to affect global political landscape (2016: US election; 2017: Germany & France election).

• Global markets have swiftly priced in Brexit impact prior to final result announcement. However, we still expect continued short-term volatility given uncertain long-term risks. On a positive note, major central banks are committed to inject additional liquidity, i.e. BOE had previously said to pump £10bn into markets to ensure sufficient liquidity.

• Closer to home, direct impact on Malaysia is limited. Malaysia’s trade with UK amounted to 1% of total exports while FDI from UK is 4% (2008-15 average). Risk to Malaysia emanates mainly from financial contagion.

• For companies under our coverage, Sime Darby, SP Setia, Genting Malaysia, YTL Power, BToto, IJM and KNM have exposure to the UK economy:
• On technical front, immediate support is situated around 1612 (16 May low) levels. Failure to hold at 1612 could see index drifting lower towards 1590-1600 territory.

Target

• Maintain our end-2016 FBM KLCI target at 1,690 based on 15.5x (historical mean) one-year forward earnings.

Strategy

• The ongoing risk aversion is expected to further strengthen US$, leading to weakening bias in MYR. This still bodes well with our advocate for exposure in export stocks. We continue to advocate exposure in companies that are less prone to earnings shocks.

• Top picks remain unchanged: Big caps: Digi, Gamuda, IJM, Tenaga and Top Glove. For small/mid cap space, our picks are Evergreen, Mitrajaya, SunCon and Unisem. Westports is removed due to uncertainty on future volume (trade) growth.

Source: Hong Leong Investment Bank Research - 24 Jun 2016