Trade developments between US-China will be one of the focuses in 1Q19, while US tech giants lowering their outlook could dampen the regional sentiment, eventually hitting Malaysia’s equities. Nevertheless, under this soft environment (sharp decline in Brent oil prices, weakening bias ringgit and challenging fiscal situation), we are still hopeful on selected sectors/ theme for 1Q19. We recommend retailers to focus on (i) Healthy dividend track record (DKSH, TALIWORKS), (ii) Budget 2019 beneficiaries (Healthcare: KPJ, TAKAFUL and East Malaysia: HSL), (iii) Export-driven (FLBHD, FRONTKEN) and (iv) RAPID Pengerang beneficiary (CCM).

Market Review

90-day trade truce, interest rate outlook and bond yield. Following several reciprocal actions from two of the largest economies in the world over the past few quarters, the situation has turned slightly calmer as the 90-day trade truce period (ending in early Mar-19) has been introduced, whereby both the US and China’s officials will be negotiating some structural reforms on the trade front. Meanwhile, markets have turned wobbly throughout 4Q18 on the back of “still hawkish” tone from the Fed (which hiked the interest rate for the 4th time in 2018 and projected 2 hikes in 2019). Another worrying factor was the declining Treasury yield spread (10y-2y) that has trended near the zero level in 4Q18, which contributed to the fear of investors that a potential global growth slowdown could be forming in the near future. These have led to a sharp fall in equities throughout December.

Negative market sentiment amid US technology and semicon rout. Chipmakers and technology giants in the US experienced huge selloffs in 4Q18 after several disappointing earnings and outlook guidance from most of the tech companies in the US in the midst of the trade war environment, which led to downward re-rating of tech suppliers’ future outlook as well. Nasdaq ended significantly lower by 17.5% in 4Q18, the worst quarterly decline since 4Q08. The spill over effect was also notable on our Bursa Technology Index, which registered a correction of 28.9% in 4Q18.
 

Source: Hong Leong Investment Bank Research - 7 Jan 2019