The lingering worries on trade war uncertainties, slower economic growth potential and inverted yield curve may continue to dampen the market tone moving forward. However, we see potential catalysts such as (i) recovering firmer Brent oil prices, (ii) optimism in construction sector, (iii) export-oriented companies amid weakening bias USD/MYR trend and (iv) defensive (consumer) and high dividend yielding corporates. Hence, we believe retailers will need to cherry-pick stocks for potential winners under the abovementioned sectors. We like (i) O&G: SAPNRG, EATECH, (ii) construction: KIMLUN, KERJAYA, TRC, GFM, (iii) export-oriented: SUPERMAX and (iv) defensive: DKSH, UCHITEC.

Market Review

Trade war(i) uncertainties still persist… The prolong trade disputes between the US and China has started since mid-2018 and has been contributing towards weakening business sentiment and slowing economic activities globally. Meanwhile, economic indicators globally are weaker since trade war started; PMI manufacturing (Figure #1) in the US, China, Japan and Eurozone have been showing declining signs over the past 6 months.

…global growth forecast slashed by the Fed and dovish monetary policy… With the weaker GDP data from US and China in 4Q18, major central banks have slashed their forecast for 2019, including the Fed, which recently slashed the economic forecast for 2019 during the FOMC meeting and reduced its interest rate outlook from 2 times to zero in 2019. This is being viewed as dovish and could be suggesting to the market participants that an economic slowdown could be setting in.

…triggered an inverted yield curve(ii). The 10-year Treasury yield has weakened against the 3-month bond yield, forming the inverted yield curve after the FOMC meeting, which led to a sell down in banking heavyweights.

(i) Trade war has not completely settle, however trade discussions are claimed to be progressing well between US and China. (ii) Inverted yield curve (10-year vs. 3-month) may point towards a recession in the next 6-24 months on a 4 out of 7 occasions (Source: Bloomberg)

Source: Hong Leong Investment Bank Research - 11 Apr 2019