• FBM KLCI etf aims to achieve a price and yield performance similar to that of the FTSE Bursa Malaysia Large 30 Index
• Despite the recent market volatility, outlook for the FBM KLCI remains optimistic on the back of favourable macro conditions including further RM appreciation and improving corporate earnings.
• Investors could attain an 8%-9% upside based on projection for the index to settle at 1,923 at end-2018 based on 18.6x 2018E KLCI EPS
• Risks include faster than expected US Fed rate hikes, disappointing corporate earnings, downgrade of sovereign rating if fiscal consolidation fails, geopolitical tensions and increasing global trade tensions

The Fund and Its Objective

FBM KLCI etf aims to achieve a price and yield performance, before fees, expenses and tax, that is similar to that of the FTSE Bursa Malaysia Large 30 Index. The Fund manager, AmFunds Management Berhad, aims to achieve a performance, over time, with a correlation of 95% or better between the Fund’s Net Asset Value (NAV) and the Benchmark. It will have an asset allocation of at least 95% in Index Shares and options and warrants referencing the Index Shares and no more than 5% in cash or cash equivalents. Income distribution is expected to be made semi-annually.

The NAV per Unit was RM1.8381 as of 5th June 2018. The Valuation Point is such time or times on each Dealing Day as determined by the Manager from time to time with the approval of the Trustee. The Fund’s NAV was RM3.073mn as of 5th June 2018 which is 0.3% lower compared to the start of the year compared to a 0.05% growth over the same period for the benchmark. The 3-year tracking error is 0.3% while the management fee is 0.5%.

Performance in 2017

In 2017, the FBMKLCI gained by 9.4% settling at 1796.81, which was its first positive performance in three years. This, however paled in comparison to its regional peers which posted double-digit growth. Throughout the year the index was supported by the stronger RM which appreciated by 9.8% to 4.0465 and net positive inflows by foreign investors of RM10.4bn despite concerns surrounding President Trump’s presidential election victory, Fed rate hikes, several elections in the Eurozone, possibility of a China slowdown and geopolitical risks between North Korea and US as well as in the Middle East.

FBMKLCI Outlook in 2018

It has been a volatile year so far the FBMKLCI having achieved an alltime high of 1,895.18 on 19th April 2018 but then tumbling to its lowest since December 2017 at 1,719.28 on 30th May 2018. Year-to-date, the index has declined by 2.3% amidst net capital outflows of RM2.4bn. The recent sell-off in the equity market was driven by the jitters following the announcement of the country’s debt level which was announced at RM1.087 trillion or 80.3% of GDP as of 31st December 2017. Furthermore, uncertainty of the ability of the current Government to close the revenue gap after the Goods and Services Tax (GST) is reduced to 0% from 6%, the petrol price stabilization program and potential toll abolishment. The selldown was also spurred by the cancellation of major infrastructure projects such as KL-Singapore High Speed Rail and MRT 3 in a bid by the Government to reduce its debt.

We nevertheless remain optimistic. The Malaysian economy is anticipated to grow at a credible 5.3% in 2018 (recently revised up from 4.9%) compared to 5.9% in 2017. This is at the lower end of Bank Negara Malaysia’s (BNM) official forecast of 5.5-6.0% in 2018 due to the high base effect last year as well as manufacturers anticipating lower demand and production activity in the second half of 2018 amid uncertainty from rising trade protectionism. Export growth will depend on the global economy and the global demand for electronics with the potential trade ware between US and China remaining as the downside risk. Domestic demand is expected to be sustained with slower public consumption and investment activity supported by stronger private consumption growth possibly due to the reduction in GST. Furthermore, the International Monetary Fund (IMF) expects the global economy to expand by 3.9% in 2018 from 3.7% in 2017 supported by continued synchronised expansion in both the advances and emerging market economies.

Meanwhile, an accommodative monetary policy by BNM will support domestic demand. In its latest annual report, BNM guided that inflation will likely average lower in 2018 (2017: 3.8%) from a smaller effect from global cost factors. Thus, we believe BNM will likely keep the Overnight Policy Rate (OPR) steady at 3.25% in 1H18 although depending on macro data points, there could potentially be room for a rate hike in 2H18. While trading of the RM has been volatile, we anticipate appreciation to RM3.80/US$ by end-2018, supported by steady sustained economic growth in 2018, expectations of higher commodity prices and potential OPR rate hike in 2H18. Therefore, the FBMKLCI could attain an 8%-9% upside based on our in-house projection of 1,923 at end-2018 based on 18.6x 2018E KLCI EPS or +1SD above the historical mean PE. This is based on estimated FBMKLCI EPS growth of 7% in 2018E.

Risk in Investing in the Fund

The Fund is subjected to a few risks such as market risk (risk that the value of a portfolio would decrease due to changes in equity prices, interest rates, foreign exchange rates and commodity prices), credit risk (risk that the counterparty to a financial instrument will cause a financial loss to the Fund by failing to discharge an obligation), liquidity risk (risk of inability to raise funds or borrowings to meet payment obligations as they fall due), single issuer risk, regulatory risk, management risk and non-compliance risk.

There are 5 main risks to the FBMKLCI outlook. Firstly, the acceleration of US Fed interest rate hikes amid a rise in inflation levels. Secondly, the possibility of weaker than expected corporate earnings. Thirdly, Malaysia could derail from its fiscal consolidation plans which may result in a sovereign rating downgrade from Fitch, Moody’s and/or S&P. Fourthly, the risk of heightened geopolitical risks in North Korea and/or the Middle East may disrupt financial markets. Lastly, the increasing global trade tensions between US and China.

Source: Affin Hwang Research - 6 Jun 2018