Yesterday, BNM cut the OPR by 25bps to 2.75%, explaining that it was a pre emptive measure to secure growth trajectory and price stability. The cut is inline with our expectations to take place within 1H20 and we do not expect any further cuts for 2020 unless the global scene deteriorates further. Sectorial wise, this is negative for banks but positive for REITs. High divvy yielders should remain in flavour in light of this cut. With KLCI dividend yield spread to OPR and 10-year MGS at +1.75SD and +2SD, this suggests room for share price upside on divvy plays. Maintain KLCI target at 1,640.

NEWSBREAK

25bps OPR cut. During yesterday’s MPC meeting, the committee decided to cut the OPR by 25bps to 2.75%. While acknowledging that the global economy continued to expand at a moderate pace, it also cited that downside risks remain due to geopolitical tensions and policy uncertainties in some countries. Domestically, it mentioned downside risks from various trade negotiations, geopolitical risks, weaker than-expected growth of major trading partners, heightened volatility in financial markets and domestic factors (commodity related sector weakness and project implementation delays). The committee stated that the OPR cut is a pre-emptive measure to secure the improving growth trajectory and price stability.

HLIB’s VIEW

Within expectations. While the 25bps OPR cut was inline with our expectations to take place within 1H20, the timing did take us by surprise as we had anticipated it to happen during the May MPC meeting. Looking ahead, our economics team is staying pat on their OPR outlook for 2020 (i.e. no further cuts for the year), unless the global environment deteriorates further causing a negative spill over to Malaysia.

Negatives and positives. Broadly, the 25bps OPR cut is negative for the KLCI by virtue of the index heavyweight banking sector (NIM compression concerns). To recap, during the last OPR cut (-25bps on 7 May 2019), the KLCI fell 2.5% within a span of 1 week. Our banking analyst feels that the 25bps OPR cut should not be as profound this time around it was well anticipated by banks; hence NIM recovery will also be quicker (see our Banking sector report today). On the possible sector positives, a dovish setting should generally spur interest in REITs in which we are OVERWEIGHT on. Although data points on the KL-REIT index are limited (only began in Oct 2017), its broad inverse relationship to OPR is still visible (see Figure #1). Within the REIT space, our top picks are KLCCSS (yield: 5.1%) and SunREIT (5.5%).

Focus on high divvy yielders. Currently, the KLCI’s dividend yield stands at 3.52%, representing a spread of 0.77% to OPR and 0.23% to 10-year MGS. These spreads are +1.75SD and +2SD above the 10-year mean, suggesting room for share price upside on divvy plays. In addition, the defensive appeal of high divvy yielders will also stand out in light of the volatile external climate. Figure #4 lists down the top divvy yielders within our coverage which we feel are sustainable.

Maintain KLCI target of 1,640. We maintain our KLCI target of 1,640 based on 16.3x PE (-0.5SD) tagged to 2020 earnings. Following 2 consecutive years of earnings contraction, this is expected to recover in 2020 at a pace of +6.4%. With foreigners being net sellers in Malaysian equities in 5 of the past 6 years, we are hopeful for this to abate in 2020 (YTD: +RM493m net buy). As it is, foreign shareholding of 22.3% (Dec 2019) is at the lower end of its historical range.

Source: Hong Leong Investment Bank Research - 29 Jan 2020