While the KLCI has recovered from its YTD low of 1,208, we believe this may be temporary, due to the concerted monetary stimulus by Central Banks globally, and the suspension of short selling activity and relaxation of margin-financing rules domestically. Arguably, the KLCI’s P/BV valuation has also tested the trough level of 1.30x, last seen during the GFC, thus suggesting a market bottom. However, we believe the market is downplaying the large economic impact of the Covid-19 virus and overestimating a revival of the economy once activity resumes. With a likely U-shaped EPS recovery, we see more market volatility ahead and expect the KLCI to bottom at 1,008, at an ROE-adjusted P/BV of 1x. Our sole OVERWEIGHT is rubber products.

Not Out of the Woods…yet

Global equity markets have recovered from their year lows. With concerted monetary and fiscal stimulus by Central Banks and governments globally, confidence has been restored. The KLCI has rebounded rapidly, up 10.11% from its low of 1,208 on 19 March, which also seems to suggest that the economy is primed for a V-shaped recovery. We nevertheless believe the market is overestimating the speed of economic recovery after the massive carnage beset by Covid-19, once economic activity resumes.

A U-shaped EPS Recovery Is on the Cards…

Our Economist Alan Tan recently cut his GDP growth and forecasts a drop of 3.5% in 2020E. With long lasting economic anxiety on the economy due to Covid-19, EPS outlook prospects look dim. With lots of uncertainty, it is too premature to factor in a V-shaped recovery as the Covid-19 infection and mortality rates are still climbing and without a vaccine in sight. A prolonged pandemic could even lead to an L-shaped recovery, in our view.

…and the Market Remains Too Optimistic

Based on Bloomberg consensus, the street expects KLCI’s 2020E EPS to grow 2.69% y-y. In the past, when GDP contracts, EPS growth tanks. In our view, the street’s looming earnings cuts will lead to a KLCI de-rating.

KLCI EPS Contraction Set to Widen to 12.7% Y-y for 2020E

Taking a cue from our lower GDP, we cut our 2020E KLCI EPS growth to - 12.7% y-y (previously -4.7%). For the rest of our coverage, we cut our EPS growth to -14.7% y-y, from -3% previously. For the earnings and TP revisions to Affin Hwang’s coverage universe, see Figures 12 and 19.

At An Adjusted P/BV, KLCI Should Trough at 1,008

During the GFC, the KLCI troughed at 1.30x P/BV. However, the KLCI’s ROE was superior then, bottoming at10.75%. Adjusted for today’s ROE, the implied trough P/BV is near the 1.0x level, which is our new end-2020 KLCI target of 1,008 (from 1,200). This is c.-2SD of the KLCI’s past-15- year mean PE and near our bottom-up computation for the KLCI of 1,064.

Suncon, Genting Bhd, Inari, Kossan and MSM Addd to Our Top Picks

We make the above 5 changes to our top picks to reflect revisions to our sector ratings, and thus remove KLCC, Axis REIT, Uchi, Apex Healthcare and ELK Desa. Our top-5 SELL calls are Maybank (MAY MK, RM7.3), Nestle (NESZ MK, RM134.5), Petronas Dagangan (PETD MK, RM19.40), MISC (MISC MK, RM7.60) and Tenaga (TNB MK, RM11.82).

Source: Affin Hwang Research - 31 Mar 2020