Outlook

• External condition remains challenging. Global growth is expected to remain challenging in 2H16 as downside risks remain high. We had earlier trimmed our global growth forecast to 3.0%, the slowest pace since GFC.

• Brexit is more of longer-term concern. The swift recovery in global financial market post-Brexit kneejerk proved that ample global liquidity had cushioned the impact well. Brexit, however, poses longer-term implications on fragility of EU and predictability of global economic policies.

• BNM safeguarding domestic growth. BNM cut the OPR by 25bps to safeguard domestic growth in view of potential weakening of the external sector. Despite being an unexpected move, the readiness to support short-term growth via monetary easing is positive for the market .

• Potentially more easing coming. While BNM sounded neutral on its next move, we opine that further easing (i.e. OPR cut and/or relaxation of property measure) could be in the cards. BNM has declared victory over its property measures by saying that financial imbalances have receded.

• Positive if combined with improved fiscal picture. We reckon that fiscal position has improved on higher oil prices and other revenue buffers. The better fiscal position enables the government to unwind some its spending cuts announced during the Budget recalibration earlier this year.

• Perfect condition for snap election? With an expected improvement in fiscal position, we expect the upcoming Budget to be a generous and friendly one. We do not rule out a snap general election in early 2017.

Target

• End-2016 FBM KLCI target raised to 1,730 based on 15.8x (slightly above historical mean) 1-yr forward earnings.

Risk

• Global – Geopolitical risk, commodity price slump, sharp China slowdown & aggressive Fed rate hikes.

• Malaysia – Prolonged erosion in consumer sentiments.

Strategy

• Perfect combo for recharge. The readiness of BNM to support economic growth via easing is overall positive for the market. Coupled with improved fiscal position, low foreign shareholding and possibility of snap election, there is potential for the market to recharge to a higher level despite still lacklustre earnings outlook.

• Positive for Property & REIT; mixed for Banks. Rate cut is outright positive for REIT and high dividend yielders. The easing bias is also positive for Property reinforced by potential unwinding of property measures. Impact on banks is mixed as OPR cut has negated the recent BR hike of some banks but increases the certainty of asset quality.

• Still like stocks with earnings certainty and yield in an environment of lacklustre earnings outlook.

• Refreshed Top Picks for 2H16: Big Caps: Digi, Gamuda, IOI Prop, PavREIT & Tenaga; Small/Mid-Caps: Matrix Concepts, Mitrajaya, SunCon, Tiong Nam & Unisem.

Source: Hong Leong Investment Bank Research - 14 Jul 2016