Despite external uncertainties such as the trade war between the US and China, Brexit and concerns over slower global growth, we believe the internal driven catalysts would be the theme to focus in 3Q19. Hence, we would be looking out for opportunities within the (i) recovering news flow in construction sector: GKENT, ADVCON and OKA, (ii) rising demand in maintenance jobs within O&G: DAYANG, (iii) consumer plays: GCB and JOHOTIN and (iv) turnaround catalysts: ARBB and BAHVEST in 3Q19.

2Q19 Market Review and 3Q19 Outlook

Temporary trade truce with China… Following the G20 summit, where both President Trump and Xi have come to a trade truce (putting on hold further tariffs), market sentiment was boosted (albeit short term) across the globe. However, the earlier imposed tariffs by the US (25% on USD250bn Chinese products) and China (up to 25% on USD110bn US goods) are still a valid concern and has dampened business environment (declining PMI, Figure #1) since last year.

…but global economic slowdown could still be setting in. With the prolong trade war between US and its trading partners, as well as the latest threat by the US to impose another round of tariffs on goods from the Europe region and Vietnam (400% tariffs on steel), central bankers globally have toned down their economic forecast for 2019-2020 and turned more dovish with expectations to adopt a more accommodative stance moving forward.

Experiencing moderate growth in Malaysia. In Malaysia, BNM has forecasted Malaysia’s 2019 GDP to grow at a range of 4.3-4.8% (HLIB: 4.5%, 2018: 4.7%). However, we do not rule out the downside risks arising from unresolved trade tensions which may spill-over to Malaysia moving into 2H19.

Foreign trade flow (Figure #2) has turned positive in Jun19… Despite the uncertainties in the global scene, Malaysian equities were seen to be more defensive in nature following the upgrade by selected foreign banks (HSBC and UBS) in May and foreign trade flows turned positive for the period in June and 1-11 July. We believe market participants could be looking beyond external concerns and focusing within Malaysia’s internal driven catalysts for 2H19.

Source: Hong Leong Investment Bank Research - 12 Jul 2019