While the recent progress on Phase 1 is positive, we feel it is still too early to pop the bubbly. Our projection for Malaysia’s 2020 GDP is a tad slower YoY at 4.4% (2019: 4.5%) and below MoF’s 4.8%. Consequently, we expect an OPR cut by 1H20. Key themes to eyeball on for 2020 are high divvy yielders, M&As, VMY2020 plays and sustained CPO upcycle. Coming off a low base from 2 consecutive years of decline, we forecast 2020 KLCI earnings growth of 6.4%. Our KLCI target for 2020 is at 1,640 (16.3x PE; -0.5SD). Top picks are Maybank, KLCCSS, Dialog, GenM, Sunway, TM, GenP, DRB, LiiHen and MBM.

Positive but cautious. Recent progress on the Phase 1 deal suggests preliminary signs of a subsiding US-China trade war. While offering a sigh of relief, we reckon it is still too early to pop the bubbly: (i) the trade war is still very much alive with 89% of the previously enacted tariffs still in place, (ii) targets to more than double US exports to China seems stretched and (iii) trade talks between the 2 have in the past, been marred by U-turns. While no doubt this development is positive, we still find it hard to turn outright “equity risk-on” based purely on the Phase 1 deal.

Slower growth for major economies... Major economies (US, euro area, Japan and China) are projected to see lower growth in 2020, dragged by ongoing trade woes, geopolitical concerns and domestic structural impediments. We project global growth to chart 3.0% in 2020 (similar to 2019) which is the lowest in the past decade and below IMF’s forecast of 3.4%. In the latter case, IMF’s higher global growth for 2020 will not be broad based but mostly coming from distressed EMs (low base rebound) rather than a resolution to trade woes. Accordingly, monetary policy conditions of most major central banks are expected to remain easy.

…and Malaysia too. While MoF has projected Malaysia’s GDP at 4.8% for 2020, our forecast is lower at 4.4% (2019f: 4.5%). Should GDP fall short of the former, this presents a case for an OPR cut which we expect -25bps in 1H20. We anecdotally read last month’s SRR cut (-50bps) as a tilt towards an easing monetary policy stance and possibly, an indirect precursor to an OPR reduction (similar to 2016’s episode).

Domestic concerns still linger. These include: (i) WGBI review (Mar 2020); even if Malaysia is retained, its weight may be lowered, (ii) falling consumer and business sentiment, (iii) PH’s declining popularity and (iv) leadership continuity beyond Tun M.

Key themes. Still, there are themes within Malaysia. High divvy yielders will remain in flavour given its defensive appeal and dovish expectations; valuations are compelling with KLCI’s divvy yield spread to OPR and MGS at +1SD/+1.5SD above mean. With P/B valuations at the lower end (KLCI: below -1.5SD; KLSC: at -1SD), we expect to see more M&A activities (especially privatisation); property stocks are close to trough valuations. We also like some of the indirect plays to VMY2020 such as GenM, REITs, healthcare and brewers (Heineken). Lastly, we believe that the CPO upcycle will be sustained into 2020.

KLCI target at 1,640. Coming off a lower base from 2 consecutive years of decline (2018 and 2019), we project 2020 KLCI earnings growth at 6.4%. KLCI’s valuations are compelling vs historical trends (PE at -1SD and earnings yield spread to MGS at +2SD) but fair against peers (PE gap to ASEAN-5 around mean). With foreigners net selling Malaysia in 5 of the past 6 years, we are hopeful that perhaps, the bottom is near. Our 2020 KLCI target of 1,640 is derived from 16.3x PE (-0.5SD) tagged to 2020 earnings. Top picks are Maybank, KLCCSS, Dialog, GenM, Sunway, TM, GenP, DRB, LiiHen and MBM.

Source: Hong Leong Investment Bank Research - 17 Dec 2019