The KLCI has tumbled 5.7% ytd, although the losses were largely over the past 2 months as market averseness increased due to tightening monetary policy in the US, a global trade war and domestic policy changes. Oil and commodity prices have also taken a breather, increasing the vulnerability of the RM. Nevertheless, our real GDP growth forecast of 5.3% (2017: 5.9%) and year-end currency assumption of RM3.80/US$ remain unchanged. Furthermore, riskreward on the KLCI has turned favourable as we believe valuations are bottoming out (>-1SD historical mean PE) while corporate earnings growth remains steady (2018E: +8.0%), a reflection of strong global and Malaysia’s GDP growth. Mid-term, we foresee a potential re-rating of the market as the impact from a more transparent and efficient government is factored in. Maintain Overweight but with a lower yearend target of 1,845.
Malaysia has not been spared from the Emerging Market (EM) exodus. Risk averseness has increased amidst domestic uncertainty and tightening liquidity (as the US raises rates). Fears that a correction in EM currencies may just be at a start are also valid, as there is increasing concerns that these markets will be unable to withstand tighter US monetary policy. Coupled with political concerns in Europe (Italy) and growing risk of a trade war, there was a flight to safety. Nevertheless, we believe that EMs are 2-tiered and should not be lumped as a single asset class. Asia’s economic growth remains robust and intact while firm commodity prices would benefit Malaysia.
Moreover, it appears that Malaysia, which usually holds the shorter end of the stick when it comes to capital flows, seems to be better weathering this storm vis-à-vis its regional peers. In our view, this could be a combination of reasons including: 1) its higher policy rates, which make the spread compelling; 2) valid reasons for a stronger RM; 3) absence of political overhang; and 4) investors willing to wager on the more-transparent new government. In our view, the KLCI’s market defensiveness will also likely prevail amidst abundant domestic liquidity.
We remain Overweight on the KLCI, so long as the synchronized global recovery theme remains solid and the US interest-rate hike trajectory does not surprise to the upside. Corporate earnings delivery should be better in 2H2018 and particularly for the Banks, O&G, Consumer, Gaming, Auto and Technology sectors (we are overweight on the former five). We lower our 2018 year-end target for the KLCI to 1,845 (previously 1,923) based on a lower PE of 18.4x (previously PE of 18.6x) after taking into account a revised time horizon (but still on a 5-year basis) and lower corporate earnings growth.
No changes to our sector positioning but we make 3 changes to our Top Buy calls, removing Sime Darby, IHH and Top Glove, although there are no individual changes to our Buy ratings for these names. In place of Top Glove, given its strong stock price outperformance we see better value in Kossan. We also prefer Bermaz over Sime Darby for a more pure-play automotive exposure that should benefit from improved domestic demand. Scicom should benefit from better earnings delivery in 2H18, especially once the maiden contribution from its lucrative Cambodian project kicks in.
Source: Affin Hwang Research - 28 Jun 2018
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