Despite a softer global scene, we project Malaysia’s GDP to normalise upwards to +4.8% in 2024. After almost two years of hiking, we reckon the Fed has finally reached its peak. A pivot next year (we’re betting mid-2024) should help risk appetite to resurface for EMs – including Malaysia which has near record low foreign shareholding – while also aiding in ringgit’s recovery. Themes that we like for 2024 are (i) continued robust recovery in tourists to Malaysia, (ii) energy transition under NETR and (iii) reinvigoration of developments in Johor. All in, we have a modest upside bias view to the market with our KLCI target at 1,550 (15.2x CY24 PE).

Better growth in 2024. Despite the softer global environment, we project Malaysia’s GDP to normalise upwards to +4.8% YoY in 2024 (2023e: +3.8%) – sitting at the higher end of the government’s official target range (4-5%), but matching its point estimate. This will be supported by steady labour market improvement, E&E recovery, continued tourism revival and the rollout of approved investments and government’s strategic plans under the Madani Economy. We expect inflation to inch higher at +2.6% YoY in 2024 (2023: +2.5%), noting that further upside is dependent on the timing of subsidy reforms – likely back loaded into 2H24. Given such, we expect the OPR to be maintained at 3.00% into next year.

Likely at the peak. After almost two years of hiking (and spooking markets) – accelerating in 2022 and decelerating this year – we reckon the Fed has finally reached its peak. Consequently, this could spell a turning point for the ringgit as past periods of peak FFR-OPR spreads saw a reprieve in the local currency. Looking ahead, we envision a -50bp FFR pivot around mid-2024, and alongside BNM staying pat, this would narrow the FFR-OPR spread by a similar quantum. This should further aid in ringgit’s recovery where we project USD-MYR to average 4.44 in 2024 and end next year at 4.30 (vs 2023: 4.54 and 4.60, respectively). Playing out of this scenario augurs well for the local bourse given (i) the -52% inverse correlation between the KLCI and FFR-OPR spread and (ii) KLCI has reacted positively during times of ringgit strength, vice versa.

Avenues for foreign inflows. Foreign shareholding on Bursa has fallen to a near record low (Nov-23: 19.6%), while their underweight position on Malaysia is one of the largest in the past decade. We believe this has bottomed and are hopeful for a reprieve in 2024 as (i) risk appetite for EMs should resurface with the Fed’s pivot, (ii) Malaysia’s growth is expected to pick-up (3.8% to 4.8%) despite easing global growth (IMF: 3.0% to 2.9%) and (iii) a more stable political climate domestically. A revival in foreign shareholding should bode well for the KLCI given their 73% correlation.

Key themes. We highlight three key themes that we expect to be on investor’s radar for 2024. These are (i) continued robust recovery in tourists to Malaysia (positive for Aviation, Brewers, Genting Group and selected mall based REITs), (ii) energy transition under NETR – with plays on RE EPCC contractors, Utilities and SMRT, and (iii) reinvigoration of developments in Johor – in this regard, we favour selected contractors and developers (both Sunway and SunCon fit the bill), as well as ITMAX.

Forecast. Coming off a flattish year (CY23: -0.3%), we project KLCI’s core earnings growth to regain traction at +8.2% in CY24.

KLCI target at 1,550. Overall, we take a modest upside bias view to the market with our 2024 KLCI target at 1,550, derived from 15.2x PE (-0.75SD 5Y) tagged to CY24 EPS. Out top picks are Public, Tenaga, YTLP, Gamuda, MAHB, Sunway, Armada, OSK, ITMAX, Aeon, SMRT and FocusP – broadly reflecting our key themes.

Source: Hong Leong Investment Bank Research - 13 Dec 2023