• In 1H19, the fund’s return of -0.14% underperformed the benchmark’s return of +0.58% by 0.72 ppt
• 2Q19 corporate earnings growth improved to -4.6% yoy from -8.4% yoy in 1Q19 - possibly signalling earnings are bottoming out.
• We lowered our end-2019E KLCI target to 1,650 (from 1,679) based on a 5-year mean PER of 18x applied to our 2019E EPS.
• Downside risks could arise from an escalation in global trade tensions between the US and China, which could lead to a disruption in economic growth, weak corporate earnings growth and sell down of emerging market stocks, including those listed on Bursa Malaysia, due to risk aversion.

The Fund and Its Objective

The Net Asset Value (NAV) per unit was RM1.6709 as at 5 September 2019, a decline of 4.63% year-to-date (YTD) and a 10.22% fall since our initiation date on 6 June 2018. Similarly, the KLCI also fell 5.37% YTD and 9.98% since our initiation respectively. The Fund’s total NAV was RM2.794m as at 5 September 2019.

The Fund’s NAV per unit stood at RM1.7446, translating to a total NAV of RM2.917m as at 28 June 2019, a marginal 0.43% decline ytd (NAV per unit of 1.7520 and total NAV of RM2.929m as at 31 Dec 2018). During the financial period under review, the Fund’s return of -0.14% underperformed the benchmark’s return by 0.72ppt. The size of the Fund remained at 1,672,000 units. For 1H19, a 0.50 sen income distribution per unit was announced, while management expense ratio was at 1.38% as compared to 1.14% in FY18. During the period under review, the Fund reduced its weightings in Financials, Material and Utilities sectors. The cash raised was then re-deployed into Telecommunication services, Consumer Discretionary and Consumer Staples stocks. The Financials sector continues to make up the largest portion at 36.40% from previously 38.25% in December 2018.

Negative Earnings Growth Momentum for 2Q19

Corporate earnings growth remained in negative territory for the fourth quarter in a row in 2Q19 at -4.6% yoy, though an improvement from the previous decline of 8.4% yoy in 1Q19. However, given the deceleration in global GDP growth and negative impact from the trade war, the risk of another leg down in terms of earnings growth could be high, in our view. The smaller decline may indicate that corporate earnings weakness is bottoming out. Broadly, sectors that largely met expectations includes the Healthcare, Insurance and MREITs while sectors that disappointed were Consumer, Plantations and Airlines.

Diligent Stock Selection Over the Market Cap Bias Strategy

Although we prefer larger market cap names because of their better quality, we believe diligence in stock picking is preferable over stock the market capitalization bias strategy. In 2Q2019, the large caps (represented by the KLCI 30 companies) fared better than the smaller caps where a larger proportion of companies delivered results that met expectations than below expectations.

Maintain HOLD With a Lower Year-end 2019E KLCI Target of 1,650

We maintain our HOLD call on the ETF with a lower year-end 2019E KLCI estimate of 1,650 (based on 18x 2019E KLCI EPS) as we believe downside risk to corporate earnings still lingers. We believe deceleration of global growth and escalation of trade tensions will increase trading volatility on the KLCI. The widening of KLCI’s PER premium against regional markets also makes the KLCI stocks less compelling for investment, amidst possible capital inflows back to the region in search of higher returns if the US cuts interest rates further. However, ample domestic liquidity should limit any sharp downside. Bursa Malaysia stands out as relatively defensive market amidst the volatility in regional markets.

Downside Risks

Key downside risks include (i) burgeoning global trade tensions between the US and China, which could lead to a disruption in global economic growth; (ii) Malaysia losing sight of its fiscal consolidation plans, leading to a sovereign rating downgrade; (iii) corporate earnings disappointments.

Source: Affin Hwang Research - 6 Sept 2019