Outlook

• End of low base boost. We expect low base boost to global growth to diminish in 2H17. Several constraints will also limit upside to global growth, including scaling back of Trump’s pro-growth measures, China’s deleveraging policy, and uncertain commodity trend. Fed balance sheet dial back, if initiated, represents a reversal of global liquidity and could affect global asset prices.

• But developed markets will continue to pull fund flows. Despite an end to low base boost, a sustained expansion in developed economies will continue to pull fund flows, reinforced by mild monetary tightening bias amid recovery in corporate earnings. In contrast, an uncertain commodity trend and unexciting growth outlook may affect sentiments towards emerging market economies.
   
• Stable but unexciting domestic economic outlook. After a spectacular growth acceleration in 1Q17, we expect Malaysia’s GDP growth to moderate in 2H17, as low base effects ebb while global growth becomes more modest. Nevertheless, macro fundamentals remain largely intact which will limit downside of the market.
   
• Ringgit to move sideways after 2Q recovery. After appreciating briefly in 2Q17, we see limited upside for ringgit in 2H17 as weakening bias of crude oil prices, Fed’s dial back on balance sheet and series of local government bond maturity could cap gain in ringgit.

• Lack of forceful theme. We do not foresee emergence of visible market theme in 2H17 as macro variables and sector dynamics are projected to remain stable. We expect the 14th General Election to be held in March 2018. 
   
• Modest earnings recovery priced in. Corporate earnings recovery has been largely priced in by the market. We expect FBM KLCI to record a modest earnings growth of +7.4% in 2017 and +4.6% in 2018.

Target

• Maintain end-2017 FBM KLCI target at 1,760 based on 16.0x CY18 earnings.

Risk

• Global – plunge in oil price, sharp China slowdown & aggressive monetary tightening by major central banks.

• Malaysia – Prolonged erosion in consumer sentiments.

Strategy

• Focus on earnings certainty and growth catalyst. We now advocate a more defensive stance in stocks with earnings certainty and/or growth catalyst. We also opine that earnings of export sector may regain luster riding on still-weak ringgit and continued global expansion.

• Foreign inflows to slow on lacklustre ringgit. After a cumulative foreign buying of RM10.5bn in Jan-May, we reckon there is not much local catalyst for foreigners to step up exposure in Malaysia’s stock market.

• Top Picks : Big Caps: Airport, Gamuda, Genting Bhd, Sunway & Tenaga; Small/Mid-Caps: DRB, George Kent, Heveaboard, Pesona Metro and United Malacca.

Source: Hong Leong Investment Bank Research - 6 Jul 2017