Despite the Ongoing Cloudy Scenes in the Global (ongoing Trade Tensions and Rising Geopolitical Tensions) and Local (WGBI Review, Domestic Political Noise) Fronts, We Have Decent Catalysts to Cherry Pick Stocks in 1Q20. We Would Look Into Sectors/ Stocks Such as (i) Plantation (firmer Crude Palm Oil Price) – MBL and APB, (ii) Construction (waiting for Vibrant News Flow in 1H20) – NADIBHD, (iii) Tech & Telco (5G and NFCP Implementation) – KRONO and TM, (iv) O&G (improving Crude Oil Price) - STRAITS and (v) Property (potential OPR Cut in 1H20) - MATRIX.

4Q19 Market Review

US – China: Partial trade truce, but still not settled. Despite US and China reaching an agreement for Phase 1 trade deal (awaiting sign off in January) after an 18-month trade tension, business environment remains wary as market participants await Phase 2, which affirmed by a tweet from President Trump in December; but his impeachment status is another noise to the market.

Malaysia: Cautious tone in 2019 due to political noise... Malaysia (FBMKLCI 2019’s performance: -6.0%) is one of the underperformers in the ASEAN region, decoupling from regional benchmark indices, with an outflow of 11.1bn by foreign investors in 2019. This could be due to the local political noise amid PH’s declining popularity and leadership continuity beyond Tun M.

…but we anticipate a better outlook ahead. HLIB expects Malaysia to record modest GDP of +4.4% YoY in 2020 (2019e: +4.5% YoY). Also, we believe several local fresh leads may surprise the market to the upside in 2020 underpinned by (i) recovery in commodities such as crude palm oil and crude oil prices (hovering above USD60), (ii) clearer policies in Budget 2020 and (iii) recovering sentiment in construction sector.

Retail Outlook and Strategy for 1Q20

Less negative sounding outlook in 1Q20. Although some cloudy scenes such as (i) WGBI review (March 2020), (ii) domestic political noise, (iii) unsettled trade war may persist in 2020 and (iv) rising geopolitical tension (US -Iran), market participants may position themselves in 2020 for a more committed position given the partial trade truce following the Phase 1 deal between US and China, clearer policies from Budget 2020 as well as decent recovery in our major commodity – firmer crude palm oil and improving crude oil prices. Hence, we expect Malaysia will be exciting to monitor for

buying opportunities. Several key themes may be seen as strong catalysts moving forward:- (i) Crude palm oil prices (+22-23% YoY and QoQ) (ii) Crude oil prices (improving in 4Q19 above USD60) (iii) Construction (increased development expenditure by 2.4% YoY) (iv) Budget 2020 (clearer policies for technology industry) (v) National Fiberisation Connectivity Plan towards 2023 (vi) Undervalued property stocks (vii) Potential M&A in the making amid sluggish share prices

Cherry picking into 1Q20. Based on the abovementioned setup, we opine that traders/ investors should cherry picked counters within plantation, construction technology & telco, oil & gas and property sectors in order to sail through a potential recovery sentiment in 2020 for local equities.

Plantation: Crude palm oil has been rallying strongly in 4Q, contributing to an average price of RM2,588 in 4Q19 (QoQ: +22.4%, YoY: +22.7%). Should we put everything status quo, we should expect positive impact in sector’s earnings in February reporting season. Hence, we like MBL and APB under plantation sector.

Construction: With the improved development expenditure from Budget 2020, coupled with a potential news flow driven quarter, we believe trading interest may be seen within the sector. Under this segment, we like NADIBHD.

Technology and telecommunication: As we are entering into the 5G era, we opine that connectivity and technology advancement will be crucial for 5G to be successful. Hence, we anticipate cloud/ data centres services and telecommunication services to boom throughout this shift of technology; we like TM and KRONO under this space.

Oil & Gas: With the recovering crude oil prices in 4Q19, we believe it will sustain a good trading momentum for O&G stocks. Also, energy index has rallied strongly by 12.5% led by steady Brent oil price above USD60. We believe STRAITS fits into the O&G pick as they are dealing with oil bunkering and trading in Malaysia.

Property: Despite lack of fresh leads for upward rerating on this sector, the potential OPR cut in 1H20 may improve affordability (albeit marginally) of house ownership. We like MATRIX for its defensive characteristic such as strong dividend yield, successful township (affordable pricing) and strong take-up arising from affordable unit prices, providing a sustainable earnings moving forward.

Source: Hong Leong Investment Bank Research - 9 Jan 2020