While FBMKLCI was the top ASEAN-5 performer at 8.7% (currency adjusted), a “risk off” approach was evident with the selloff in small caps, construction and property. For 2Q18, investors are likely to focus on Trump’s tariff tantrums (we see limited and contained impact on Malaysia) and the impending GE14. With BN set to unveil its manifesto this weekend, we envisage the polls towards end April/ early-May with a status quo outcome (i.e. BN to remain in government). A “risk-on” approach should set in once GE14 is done and dusted. We remain positive on Malaysian equities on a backdrop of domestic consumption pick up, stronger ringgit (1Q18: +4.8% QoQ) and mega construction jobs. Maintain FBMKLCI target of 1,880 premised on 16.5x P/E (0.5SD above mean) tagged to 2018 earnings.

Macro fundamentals intact. Coming into 2Q18, we continue to see strong signs of global economic activity. While some leading economic data (global PMI manufacturing index) has increased at a slower pace, overall 1Q18 average still signals a robust operating environment. In particular, firms are signalling their ability to raise output prices in an environment of stronger demand and higher purchasing power of their clients. The better-than-expected operating environment may lead to positive spillovers to Malaysia’s GDP growth. During its annual report release last week, BNM projected Malaysia’s GDP at 5.5-6% (point estimate: 5.7%). Nonetheless, downside risks have also risen of late following Trump’s trade tariff threats. As the direct impact to Malaysia is limited at this point of time, we maintain Malaysia’s GDP at 5.3% in 2018 and OPR rate at 3.25% for the rest of 2018. However, should global trade war escalate further, it could have further repercussions on global growth and trade with implications on Malaysia.

Top performer within ASEAN-5. Jan was off to a good start with the FBMKLCI gaining 4.8% during the month in what was touted to be an “election rally” coupled with the DJIA hitting an all-time high as well. However, the 1 st week of Feb saw a 3% decline in the FBMKLCI due to the selloff spillover from the DJIA amid concerns of faster than expected rate hikes by the Fed. Nonetheless, much of the FBMKLCI’s early Feb losses were eventually recovered in Mar with the index ending 1Q18 up 3.7%. Against its ASEAN-5 peers on a currency adjusted basis, the FBMKLCI was actually the top performer in 1Q18 with returns of 8.7%, thanks to the 4.8% appreciation in the MYR.

Source: Hong Leong Investment Bank Research - 3 Apr 2018