KLCI recorded 0.7% and 2.1% losses in Jan and YTD. KLCI notched a YTD high of 1,500.9 (25 Jan) amid IMF’s less bearish view on global economic growth in 2023, backed by a potential Fed "pivot" given Powell’s statement that disinflationary process was underway, coupled with China's reopening optimism. Sentiment was also aided by government’s pledge to ease and fasten hiring foreign workers in five critical sectors and sub-sectors.  

However, the euphoria faded as the index slipped 0.7% in Jan to 1,485.5, and continued to slide 1.4% in Feb to end at 1,464.6 on 9 Feb, taking cues from: (1) increasing hawkish Fed chorus following the red-hot US January nonfarm payroll and strong ISM services data; (2) underwhelming US mega-caps tech results, (3) growing geopolitical concerns, with the US preparing to impose a 200% tariff on Russian-made aluminium and Washington’s move to shoot down an alleged surveillance balloon from China, (4) pending more clues on policy front ahead of the re-tabling of Budget 2023, (5) ongoing 4Q22 results and (6) prolong foreign selling (Sep 2022-Feb 2023: RM4.6bn).

Further consolidation prevails after a decisive breakdown below multiple key supports. After plunging 2.1% YTD and closing below the support trendline and 200D MA, KLCI is likely to trend lower with good supports near 1,430-1,450-1,460 levels, considering KLCI’s CY2023 valuation is not especially demanding at 13x P/E (-3SD vs 10Y mean) and supported by low foreign shareholding (Jan 2023: 20.4% vs historical low of 20.1% in Aug 2022), which would help contain an exodus. Conversely, any relief rally is likely to be capped at 1,490-1,500-1,520 due to lack of fresh catalysts. Key events to watch out for Feb: ongoing 4Q22 results season, Malaysia’s 4Q GDP (10 Feb), re-tabling of Budget 2023 (24 Feb), and upcoming Parliament sitting (13 Feb-30 Mar).

Reiterate high-quality stocks investment, underpinned by our January alpha picks outperformance vs KLCI. 8 out of 10 of our Alpha Picks generated positive returns, with the portfolio gaining 5.5% since our report on 12 Jan, outperforming the FBMKLCI (-1.6%). We advocate a risk-on strategy, capitalizing on the relief rally that began from 1,373 (2Y low) despite anticipating near term choppy waves. While none of us can predict how an environment of continued market volatility will ultimately play out, we believe investing in high-quality companies with strong business models, sound balance sheets, and stable dividends could form the bedrock of an investor’s equity portfolio, reduce volatility, and help weather the potential market storm.  

Appealing investment themes for Feb include: CARLSBRG and GENTING (recovery and reopening play), RHBBANK (grossly oversold at cheap valuations supported by attractive dividend yield), RGB (a reputable supplier of casino slot machine equipment and concession provider), PTRB (a leading frozen seafood producer from East Coast with key markets spanning from Malaysia, Asia Pac and Middle East), EVERGRN (solid balance sheet and sound DY to cushion downside), BJFOOD (benefiting from domestic economy recovery and border re-opening), ASTRO (deep in value and superb dividend yield).

Source: Hong Leong Investment Bank Research - 10 Feb 2023