Heightened volatility was noticed after Trump’s protectionist measures and the Fed’s interest rates outlook, dampening the sentiments across the globe. Investors have shifted the focus to heavyweights from small cap and lower liners, with the help from foreign inflows in 1Q18. Moving forward, with the progressive macro developments and ringgit appreciation bias may provide support to market once GE14 is settled. We remain cautiously optimistic on Malaysia’s equities with the focus in (i) construction and infrastructure-related, (ii) defensive sectors, (iii) small cap and lower liners and (iv) oil and gas.

Market review - The Trump card

Snapping the 9-quarter winning streak. Wall Street closed first time in the red after 9 consecutive quarters of rally. There were several reasons that put the pause to the rally such as the Fed’s monetary policy normalisation and the rising interest rates environment, where consensus are expecting 2 and 3 more rate hikes in 2018 and 2019, respectively. The melt down on the major indexes (Dow, S&P500 and Nasdaq) were intensified as President Trump presented with his wild card (protectionist measures), imposing import duties on steel and aluminium products and tariffs at the world’s second largest economy, China, which investors fear that it may escalate into a trade-war and dampen global growth, eventually. Moreover, the reshuffling of Trump’s administration with a few high-profile departures (replaced by candidates with more combative approach to foreign and trade policies) created the uncertain market sentiment and heightened geopolitical tensions. Investors were also worried on the rich valuations of S&P and Nasdaq against historical 3Y/5Y average with lacklustre earnings growth.

Shifting Focus on Heavyweights With Sustained Foreign Participation

Small cap and lower liners being side lined. Ahead of GE14, investors were shifting their risk appetite from small cap and lower liners towards heavyweights, resulting in the fall of FBM Small Cap and FBM ACE by 12.9% and 17.4%, respectively throughout 1Q18, while FBM KLCI rose 3.7%. We believe the subdued sentiments were due to the perceived political risk in Malaysia, as well as expectations of lacklustre earnings prospects in 1H18 considering heightened external headwinds, resulting in the cautious trading tone on Bursa Malaysia (1Q18: there were 78% decliners vs 22% advancers). Nevertheless, defensive stocks within consumer sector and finance were focused and average daily trading volumes on Malaysia’s exchange in 1Q18 stood at 3.19bn (4Q17: 2.54bn).

Foreign Participation Intact. We noticed improving foreign participation (Figure #3), which stood near the 2.2bn inflows (vs 0.7bn inflow in 4Q17) and the FBM KLCI was being supported well above the 1,860 level. Meanwhile, ringgit trend observed a sharp appreciation towards RM3.92/US$ (vs. average RM4.16/US$ in 4Q17).

Source: Hong Leong Investment Bank Research - 6 Apr 2018