With global uncertainties (trade war and Brexit) extending into 2Q19, the dovish tilt by major central banks (Fed and ECB) as well as BNM may continue. While we do not envision an OPR cut in the next MPC (6-7 May), dovish expectations itself should stir interest in high dividend yielders. We also see a possible sequential weakening of the ringgit in 2Q and would tactically angle on selective export plays. Following earnings changes, our KLCI target is cut to 1,710 (from 1,750). KLCI EPS growth of 2.1% and 4.5% is below the post-GFC CAGR of 6.2%.

Major central banks turn dovish. On the backdrop of slowing global growth and policy uncertainty (i.e. US-China trade war and Brexit), major central banks have pivoted to a dovish stance. In Mar, the Fed and ECB said it expects interest rates to remain unchanged for 2019. More accommodative monetary policies were also announced: (i) the Fed intends to conclude its balance sheet reduction at the end of Sept 2019 and maintain the level for an indefinite period of time and (ii) ECB plans to roll out fresh funding for banks (TLTRO-III) from Sept 2019 to Mar 2021.

No OPR cut but dovish slant remains. For Malaysia, we maintain our 2019 GDP forecast of 4.6%, which is within BNM’s range of 4.3-4.8% (point est: 4.7%). However, we note that BNM’s recent GDP projection is lower than (i) MoF’s earlier target of 4.9% for 2019 and (ii) 2018-2020 projected range of 4.5-5.5% during the 11MP MTR. Despite negative inflation in Jan-Feb, we expect the full year 2019 print to come in at +1.5% (2018: +1.0%). While we do not anticipate an OPR cut in 2019, we opine that BNM may continue to sound cautious as global downside risks remain high.

Uncertainties to continue in 2Q. The deadline for US-China trade war talks has been extended from 1 Mar to possibly May-June during the proposed Trump-Xi summit. On Brexit, this has been postponed from 29 Mar to possibly 12 April (no deal deadline). It is a forgone conclusion that these external uncertainties will persist into 2Q and as such, we feel that BNM will continue with its dovish bias for the upcoming MPC meeting (6-7 May). Consequently, we reckon there could be a possible sequential weakening of the ringgit in 2Q.

Ride on expectations. Although we feel that an actual rate cut is unlikely in the next MPC meeting (and for 2019), the dovish expectation itself may stir interest in such plays for 2Q19. YTD, the 10-year MGS yield has fallen 32bps to 3.75%. For equities, we expect high dividend yielding stocks to garner interest on back of dovish expectations. In this regard, we like selective REITs (IGBREIT and MQREIT), BAuto, Taliworks and Lii Hen. For liquid large cap yield, we highlight Maybank (6.4-6.6%). While this sounds counterintuitive given NIM compression if a rate cut actually happens, we estimate the negative earnings impact will not exceed 2.5%. On expectations for a sequentially weaker ringgit in 2Q, export plays could return; we like Top Glove and Lii Hen (also a yield play).

Reduce KLCI target to 1,710. After incorporating earnings changes (in particular, downgrade of plantation sector to UNDERWEIGHT from Neutral) and re-tabulation of 2018’s base (-4.9% YoY), we now project KLCI EPS growth of 2.1% for 2019 and 4.5% for 2020. Our KLCI target is reduced to 1,710 (from 1,750), which is based on 15.7x PE (-1SD unchanged) tagged to mid-2020 EPS. From a valuation standpoint, PE (1 year forward earnings) is now close to -1.5SD while P/B is approaching -1SD. However, this comes on back of lacklustre earnings outlook which is below the post GFC CAGR of 6.2%. Our top picks (which mostly have a yield angle) are Maybank, Top Glove, Sunway, IGBREIT, TIME, DRB, BAuto, Taliworks, Frontken and Lii Hen.

Source: Hong Leong Investment Bank Research - 1 Apr 2019