Multiple tailwinds to support a sustainable LT downtrend line breakout

KLCI scaled higher in Jan with a 4% gain, breaking away from the typical Jan jinx. The KLCI rallied 4% to 1,513 in Jan 24, extending its gains for the 4th consecutive month, and breaking away from the past 5/10-year of losses in Jan (average 5/10-year loss: - 2.4%/-1.0%). In Asia, KLCI was ranked 2nd, behind Japan (8.4%), outperforming its peers such as Vietnam (3%), the Philippines (3%), Hong Kong (-9.2%), China (-6.3%), Korea (-6%), Thailand (-3.6%), Singapore (-2.7%) and Jakarta (-0.9%).

Bursa Malaysia’s upward trajectory is likely to continue, at least in 1Q24. With many negative news already being priced in, we remain constructive on equities, underpinned by: (i) soft landing narrative in the US amid decelerating inflation, Fed’s expected pivot and stable corporate earnings (S&P 500 CY2024/2025: 11%/9%, Factset); (ii) potential stabilisation in China’s economy in anticipation for more concrete measures from the government to rejuvenate its embattled economy and stock markets; (iii) domestic political stability paving the way to pursue greater fiscal and structural reforms, as well as continuous execution of the macro blueprints launched in 2023 (i.e. NETR, NIMP2023, reinvigoration of developments in Johor, subsidy rationalisations, etc); (iv) increased risk appetite by foreigners for the under owned Bursa Malaysia (with foreign shareholding at all-time low of 19.5% in Dec 2023); (v) improved core corporate earnings outlook (CY23:- 0.3%, CY24: +8.2%), anchored primarily by utilities, banks and plantation amid multiple tailwinds from favourable policy, tourism, consumption and currency; and (vi) the “China+One” strategy as global manufacturers trim their dependence on China and reconfigure their supply chains, which in turn will provide trade and investment opportunities for the ASEAN region (including Malaysia).

Risks to our call. Downside risks could arise from (i) new commodity and supply disruptions following renewed geopolitical tensions, especially in the Middle East. Shipping costs between Asia and Europe have increased markedly, as Red Sea attacks reroute cargoes around Africa; (ii) core inflation could prove more persistent and pushback on the timing of Fed’s pivot; (iii) a slower pickup in China’s economy; and (iv) heightened US-China tensions; and (iv) renewed selloff in Ringgit (vs USD).

KLCI target at 1,550. Current oversold and undemanding KLCI’s CY2024 valuation at 13.6x P/E (slightly below -1SD vs 10Y mean), a decent 4.1% CY24E DY and all-time low foreign shareholding (end-Dec: 19.5%) would help to cushion any sharp correction. 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.

Technically, there are ingredients for KLCI to advance further, supported by the LT downtrend line breakout and the double bottom formation. Barring any decisive breakdown below the 1,460-1,475 supports, we remain optimistic that the KLCI could march higher towards our envisaged 1,528-1,550 resistance zones. Conversely, a decisive fall below 1,460 may drag the index lower towards the 1,430-1,450 territory.

Appealing investment themes for short term trading. We remain cognizant of nearterm opportunities and challenges, and investor outperformance will invariably depend on astute stock picking. Hence, we advocate short-term trading on thematic and defensive investments, prioritize high-quality diversified stocks with solid concepts and sound balance sheets, while regularly reviewing the portfolio to reduce volatility and withstand market turbulence.

Our stock picks in Feb include: (1) SCGBHD (promising cable demand from the public and private sectors coupled with margin expansion); (2) MNHLDG (bright outlook within the data center industry and power infrastructure anchored by the NETR and TNB’s capex under RP3 & RP4, as well as Corporate Green Power Program (CGPP); (3) MAG (well-positioned to capitalize on the sustainable seafood demand in China, as well as the ready-to-eat (RTE) and ready-to-cook (RTC) shrimp products); (4) YTLPOWER (multiyear earnings growth from its data centre foray, a turnaround for Wessex Water and the earnings sustainability of PowerSeraya); (5) AEON (capitalize on the expected turnaround in its Property Management Services and retailing divisions); (6) FOCUSP (both optical and F&B segments are poised to continue their growth trajectories with the group’s brand equity and popularity of Komugi (a premium Japanese bakery) products); (7) ICON (attractive valuations at 8x FY25f P/E vs OGSE’s 12x P/E, supported by a significant upswing in the FY23-FY25 EPS CAGR of 109% amid an impending renewal of 11 out of 18 OSVs with the latest daily charter rates); (8) PERDANA (a turnaround play and a proxy to the elevated O&G activities benefitting its OSV division); (9) CAPITALA (a direct proxy to the buoyant air travel demand recovery and awaiting the impending upliftment of its PN17 status); (10) TEOSENG (solid near term earnings momentum will sustain into the next few quarters, underpinned by higher production capacity for eggs, recognition of subsidies for eggs, and healthy growth prospects for animal health products. Over the longer term, we believe egg prices will stay high even post price ceiling and subsidy removal); and (11) UMC (promising growth trajectory of its manufacturing division post-expansion, as well as its advantageous position to leverage on the government's pledge to raise public healthcare expenditure to 5% of GDP).

Source: Hong Leong Investment Bank Research - 5 Feb 2024