Highlights

• Global economy on firmer footing. Global growth is expected to continue its momentum in 2018 at 3.7%, a tad higher than 3.6% for 2017. Growth in advanced economies will be driven by domestic demand and a stable operating environment while emerging and developing economies are anticipated to recover further from firmer commodity prices. With moderate inflation prospects, we expect global monetary policy to normalise at a gradual and synchronised manner.

• Resilient growth for Malaysia. We forecast Malaysia’s GDP growth at 5.3% for 2018 (2017e: 5.8%). The key support for growth is expected to be domestic demand at 6.6% for 2018 (2017e: 6.5%), driven by increased public spending amid steady private spending. We have an appreciation bias on the MYR and expect a range of 4.00-4.20 against the USD with mean of 4.10 for 2018 (2017 average: 4.3 MYR/USD). On the OPR, we expect a one off normalising rate hike of 25bps which could potentially taking place as early as this month.

• Worst performer last year . Although the FBMKLCI rose 9.4% in 2017, it was the worst performer amongst ASEAN peers. Even after adjusting for MYR gains (+10.9% YoY), the FBMKLCI’s returns still ranked 2 nd lowest at 21.3% (ahead of JCI at 19.3%).

• 4 themes for 2018. Anecdotal evidence (recovering CSI, bottomed out auto sales, stronger retail sales and higher air passenger traffic) points towards a revival in domestic consumption and we favour autos and aviation for this play. 2018 will undoubted be a year for 14GE which must be held by 24 Aug (we foresee March and April as the most probable window) and we expect the incumbent BN to remain in government (from heightened 3-corner fights) which should be positive for the market, especially if its 2/3 rd majority is regained. We also expect the MYR to appreciate by 4.9% in 2018 on an average basis which would be positive for auto, aviation, power and media but negative for tech and wood manufacturers. Lastly, we expect the robust flow of construction jobs to continue into 2018, driven by mega projects such as the ECRL, Pan Borneo Sabah, MRT3 and HSR.

Risks

• Higher operating cost (i.e. fuel and gas) and labour cost (foreign labour levy and EIS) as well as MFRS9 (impacting banks).

Valuation

2018 KLCI target of 1,880

• We project 7.3% FBMKLCI earnings growth for 2018 (2017e: 8.6%) driven by banks, plantations, gaming and healthcare.

• Our 2018 FBMKLCI target of 1,880 is premised on a 16.5x P/E multiple, translating to 0.5SD above mean. We believe this is palatable as we expect higher investor risk appetite once 14GE is done and dusted.

• Foreign shareholding of 23.1% (Nov) is now at historical mean and we believe this would gain further traction post 14GE.

Stock Picks

• Large caps: Tenaga, RHB, MAHB, Genting, Gamuda and Sunway.

• Mid-small caps: DRB, Mitra, Lay Hong and Taliworks.

Source: Hong Leong Investment Bank Research - 4 Jan 2018