• Despite persistent net outflows, the KLCI has outperformed its regional peers.
• A surge in retail participation and a solid thematic play has helped lift the KLCI.
• Remaining Neutral on the KLCI but raising year-end target to 1,650 to reflect market liquidity, suspension of short selling and our optimism over the glove players. HSS added to Top Buy list

The KLCI Has Weathered the Net Outflows Better Than Expected

The KLCI has gained 2.1% since our last report in June and has remained relatively robust amidst our earlier expectations of some weakness, especially after the strong gains since the March lows. The equity market has nevertheless continued to see net outflows over the past 7 months, although this has not held back the KLCI; in fact, it has outperformed its regional peers.

Strong Retailer Interest Partly the Reason

The KLCI’s performance can, however, be attributed to strong retailer interest and a solid thematic play. The market’s turnover velocity is at an all-time high, as retailers swamped the market during this loan moratorium period (till end-Sept), in our view. As at end-July, retailers accounted for 35% of market participation, compared to 22% a year ago, and has continued to rise compounded by gains and a herd mentality. The FBM Small Cap index is up 77% from its Ytd lows, more than double that of the KLCI.

..and a Solid Thematic Play Has Helped

Apart from the lower liners, glove manufacturers have been in focus due to their improved fundamentals underpinned by a surge in demand while capacity remained restrained, leading to an unprecedented 40% increase in ASPs ytd. Glove sector earnings have been consistently revised up and we expect 2021E sector earnings to jump 38.3% after surging 244% in CY20E. The other KLCI components are, however, pretty lifeless and down an average 10.8% ytd (excluding glove players).

Still Neutral, But Year-end Target Raised to 1,650

We think that it is still premature to expect long-term sustainable gains for the KLCI at this point and remain cautious on the broader market given market valuations and the speed of the economic recovery. Near term, this will however be dwarfed by the strength of market liquidity, suspension of short selling activities till year-end and the doubling of daily online settlement limits. Meanwhile, stock prices for the glove players, incidentally our only sector Overweight, will continue to do well over the near term and thus lift the KLCI. Our 2020 KLCI year-end target is raised to 1,650 based on its 5-year mean PE of 19x (previously at 17x). The key risks for the market would be an earlier-than-expected vaccine for Covid-19 which could result in a collapse of glove stock prices and the KLCI, a sovereign rating downgrade, further weakness of the US$ and resulting fund inflows, a sharp decline in oil prices and geopolitical risk.

HSS Added to Top Buys

We recently upgraded HSS to a Buy over improving prospects of a revival of mega infrastructure projects in 2020/21. It has a competitive advantage which puts it in a commanding position to potentially win bids relating to the recently revived Rapid Transit System Link and even the High Speed Rail project. We add HSS to our Top Buys in place of Taliworks. We make no changes to our other Top Buys

Source: Affin Hwang Research - 10 Aug 2020