Outlook

• Trump policies vulnerable to disappointment. Trump policies have been largely priced in by the market. The “hope” trade may reverse once Trump takes office. We expect US to hit speed bump in 1Q on effects of strong US$, higher borrowing costs and weather disruptions.

• China curbing disorder capital flight. We expect China to come harder in scrutinizing outflows and maintaining RMB stability. A successful curb coupled with easing of US$ strength may help restore confidence in EM currencies.

• Global politics may still add to volatility. Later part of 2017 will face series of uncertainties in global politics after Brexit and Trump presidency in 2016. With the lining up of Brexit negotiation and Euro area elections (Netherlands: Mar; France: Apr; and Germany: by Oct), we can expect intermittent event-driven volatility throughout the year.

• Stable domestic economic outlook. While external outlook remains rocky, we expect the Malaysian economy to chart a smoother path in 2017, with an uptick in GDP growth to 4.5%. All sectors are expanding reinforced by all-time high construction project awards and firmer commodity outlook. Macro fundamentals remain largely intact to keep sovereign ratings unchanged.

• Sentiment to improve along with ringgit. We see market getting over with the extreme of US$ strength in 1Q and expect investor sentiment to improve along with easing of pressure on ringgit.

• Earnings recovery in sight. Still hopeful for FBM KLCI earnings to recover in 2017 (+10.3%) and 2018 (+7.9%) after several years of disappointment. Key risk to profitability is further squeeze by government due to policy change.

Target

• End-2017 FBM KLCI target at 1,760 based on 16.0x one year forward earnings.

Risk

• Global – plunge in oil price, sharp China slowdown & aggressive Fed rate hikes.

• Malaysia – Prolonged erosion in consumer sentiments.

Strategy

• Focus on earnings certainty. We advocate defensive stance in stocks with earnings certainty and domestic oriented catalysts. Despite expectation of modest growth recovery and firmer commodity prices, there could be sporadic externally-induced volatility could shock the market.

• Ringgit reversal could spice up sentiment. The recipes for a market rebound are almost here, i.e. growth stabilisation, firmer commodity prices, with the exception of stronger ringgit outlook.

• Top Picks : Big Caps: Digi, Gamuda, Genting Bhd, Sime Darby & Tenaga; Small/Mid-Caps: HSPlant, Matrix Concepts, Pesona, SunCon & Time dotcom.

Source: Hong Leong Investment Bank Research - 5 Jan 2017