We remain Positive on the FBMKLCI as we believe that there is further room for global equity markets to rally. The FBMKLCI, which has lagged behind, should finally play catch up. Low foreign ownership in the equity market, a still undervalued Ringgit, the return of corporate earnings growth and attractive valuations form the basis of our thesis for stronger returns on the FBMKLCI in 2018. Improving consumer and business sentiment and a pre-election rally could also aid performance of the FBMKLCI. We roll out our end-2018 index target of 1,854, based on a past-5-year mean PER of 17x applied to our 2018E earnings.

December Performance to Sustain Into 2018

The FBMKLCI is up 5.8% ytd, also its first gain in 4 years, although significantly underperforming global equity markets in 2017. While FBMKLCI performance has been pretty much lackluster since 2Q17, it posted a 35.21- pt gain in December mtd, likely due to its severe underperformance, improving macro datapoints and attractive valuations (16.7x 2018E EPS). We think the key to better performance in 2018 lies in stronger consumer/business sentiment which we believe will be driven by recent appreciation in the RM (+9.8% Ytd vs. USD). We expect domestic demand to improve and drive a broad-based recovery in 2018E corporate earnings (Affin universe: +8.5%; FBMKLCI components: +4.8%), while enhancing the quality of earnings growth.

Sector Allocation and Stock Selection

We upgrade Rubber products and O&G sectors to Overweight (from Neutral), joining Banking and Financial Services, Construction & Infrastructure, Insurance, Gaming, Utilities and Small-mid caps. We lift Auto & autoparts to Neutral (from Underweight) as we expect better earnings from a milder TIV improvement and positive currency impact. However, we downgrade Building materials to Underweight largely due to our SELL call on Lafarge, a result of an ongoing price war and weak demand. For our top picks (all BUY rated), we like Maybank (MAY MK) Hong Leong Bank (HLBK MK), Tenaga (TNB MK), Top Glove (TOPG MK), Inari (INRI MK) and Serba (SDH MK) as large caps; among small caps we prefer Globe (GTB MK), Hai-O (HAIO MK), Apex (APEX MK) and HSS (HSS MK). We also flag 3 BUY-rated alpha picks: Jaya Tiasa (JT MK, RM1.08), UMWOG (UMWOG MK, RM0.29) and Scicom (SCIC MK, RM1.60).

Key Investment Themes

We identify 7 investment themes: 1) infrastructure spending; 2) improving domestic demand; 3) higher interest rates, 4) a stronger RM; 5) general election (GE) 14; 6) insurance sector consolidation and 7) small-mid caps. Our stock picks that fit these themes are HSS, Aeon, Aeon Credit, Alliance Bank, Maybank, RHB Bank, FGV and Allianz.

Remain Positive on Malaysia; rolling out end-2018 index target of 1,854

We remain Positive on Malaysia and introduce our end-2018 FBMKLCI target of 1,854 points based on a past-5-year mean PE of 17x and our 2018E EPS (end-2017 target: 1,770). In our view, risk reward is favourable as 1) valuations have turned appealing both against historical averages and relative to peers; 2) macro datapoints are improving; 3) an expected rise in consumer/business sentiment underpinned by a stronger RM which we believe will drive domestic demand and thus, a broad-based recovery in corporate earnings, and 4) foreign ownership on the FBMKLCI is low in view of foreign investors’ consensus Underweight rating on Malaysia.

Source: Affin Hwang Research - 18 Dec 2017