Unsettled trade developments will continue to weigh on the regional stock markets, while FBM KLCI could remain on a stalemate tone ahead of both the 11MP mid-term review and Budget 2019. We opine that the trading tone may be muted without any major re-rating catalyst for Malaysia’s corporates at least for the near term. While we think there should be minimal “goodies” in the Budget 2019 but any positive surprises should trigger buying interest into local market. We reckon retailers to deploy a defensive approach in 4Q18. Sectors to monitor: (i) defensive (PHARMA), (ii) export-oriented (SALUTE, SUPERMAX, POHUAT), (iii) O&G (DAYANG, UZMA) and (iv) thematic - water sector (DANCO, HSSEB).

Market Review

Trade tensions are piling up amid stern Trump’s protectionist actions. The trade war officially started in July 2018 soon after Trump administration imposed tariffs (25% on USD50bn and 10% on USD200bn) on China products. China has also retaliated with certain measures (25% on USD50bn and 5-10% on USD60bn). These reciprocal actions have contributed to the heightened market volatility in 3Q18, which we noticed a huge sell down in China (SHCCOMP) and Hong Kong (HSI) stock exchanges, declining from the peak by 26.3% and 21.7% towards the recent lowest point of 2,644.30 pts and 26,219.56 pts, respectively. Should there be an extended trade war, it could crimp into corporate earnings and eventually dampen global growth moving forward.

Trade battle turned ugly for EM. In the recent news flow, we observed that President Trump has forced higher tariffs on Turkish metals, which causes the Turkish lira into a downward spiral, losing 57.6% YTD. As collateral damage, most of the EM currencies were under pressure; our MYR has weakened against USD by 2.6% and 1.9% in 3Q18 and YTD, respectively. Nevertheless, our MYR was amongst the stronger currencies relative to its regional peers (Figure #2).

No rerating catalyst at this moment... Post-GE14’s overhaul on Malaysia’s fiscal situation were one of the main factors that led towards a lacklustre market and investors were uncertain on the corporate outlook following the axing in several construction mega projects and there were not many upward rerating catalysts on most of the sectors amid a potential slowdown in economic activities. Although we saw a decent recovery in share prices during 3Q18, we believe investors were turning on the bargain hunting mode as stocks were looking oversold with decent valuations.

Fleeing of foreign funds has stabilised. Foreigners were still fleeing the local bourse, with an outflow of RM1.7bn in 3Q18, but at a smaller quantum compared to 2Q18 of RM9.0bn. Meanwhile, September statistics show that the foreign trade flows turned positive at RM66.3m.

Source: Hong Leong Investment Bank Research - 8 Oct 2018