The FBMKLCI tumbled 1.9% yesterday, in tandem with regional markets following China’s retaliation to the US’ trade tariffs. The potentially US$50bn of tariffs (from the initial US$3bn) on US imports announced suggests that a global trade war could be imminent. We estimate first order effects of weaker global and domestic GDP and potentially a firmer RM. Our initial take on this event is that market earnings will be negatively impacted leaving key sectors like the banks, consumer, transportation and property sectors weaker. Autos, utilities, plantations and the construction sector could be beneficiaries, the latter especially if the government resorts to pump priming to lift domestic activities. However, our base case view is that a full blown trade war is unlikely and hence remain cautiously optimistic on the FBMKLCI with an unchanged 2018 year end target of 1923 (based on 18.6x 2018E market EPS). We nevertheless expect the market to remain volatile over the near term but believe that the larger caps should be better able to weather this current storm. Our Top 5 tactical picks are Tenaga, FGV, AirAsia, Top Glove and Sime Darby.

More losers than gainers

A full blown trade war will be detrimental on global GDP growth and consumer/business sentiments. Of the 18 sectors under coverage (Fig 4), we identify the Banks, Consumer, Technology, Property, MREITS, Gaming, Transportation, Insurance, Building materials and Media sectors to be net losers from this event. Notably, these are also some of the major contributors to our 10% market earnings growth for 2018E, putting overall market earnings and valuations at risk. While exporters are usually victims of a stronger RM, we think that the Rubber glove players will walkaway this event relatively unscathed given robust current demand, as substitution for China’s vinyl gloves sustains.

Potential Beneficiaries Include Autos and Utilities

We flag the Auto, Plantation and Utilities as potential sector beneficiaries. While first order effect from weaker global GDP growth would have a negative bearing on these 3 sectors, we believe that impact from a firmer RM will have a stronger impact and positively impacting margins for the auto players and currency gains for US$ borrowings for the utility players. Tenaga remains our preferred Utility play while we also like Air Asia for a similar play on RM strength given its US$ denominated debt.

…and the Planters and Contractors

For plantations, we are of the view that impact from the tariffs imposed by China on US soybean imports would positively drive demand for CPO as a substitute leading to a more favourable price outlook. FGV is our top pick for the sector (please also refer our accompanying note on Plantations). On a more positive note, the construction and infrastructure sector could also be a beneficiary from pump priming activities in the event of an economic slowdown. The O&G sector will also be relatively shielded unless oil prices collapse, on the back of weaker global demand.

Source: Affin Hwang Research - 5 Apr 2018