• KLCI’s relative outperformance and political uncertainty suggest limited catalysts for fund inflows in 2021. Upside may also be capped by limited inflows from EPF  
• Year of the Bull may, however, be favourable to retail investors as they switch out of low interest-rate instruments. Small-mid caps likely to be in favour, with our picks being MTAG, Aeon Credit, VSI, Scientex and Inari
• Raising Technology to Overweight and Gaming to Neutral; Tenaga and MTAG added to our Top Buys for 2021. Introducing our five ESG picks. Maintaining Neutral rating on the KLCI with a year-end 2021 target of 1,730

A relatively good 2020 after all…

Despite the recession, the KLCI has performed admirably well, gaining 2.7% ytd and outperforming most of its regional peers. Strong interest in the glove sector, however, masked the performance of the broad market, which has declined 5.6% ytd.

…but the “easy money” has been made

Although fiscal and monetary policy remains accommodative and investors are supported by governments coming to the rescue in the event of a market collapse, we believe that the “easy money” has been made. In this coming new year of the Bull, a weak RM, limited foreign flows, more subdued investments by the EPF and given the KLCI’s stellar performance ytd, further outperformance by the large caps may be challenging, limiting upside for the KLCI.

Small-mid caps may be the flavour in this Bull year

However, as retail interest continues to remain robust, driven by the prolonged low interest rates, there will likely be a case for the small-mid caps. With a sentimentdriven market spurred by positive development on the availability of vaccines, focus will likely remain on solid quality names that have come out of the recession unscathed. Our picks in this space are MTAG, Aeon Credit, VSI, Scientex and Inari.

Overweight EMS, BM, Glove, Utilities and Technology (upgraded) sectors

Given the limited upside for the KLCI, we remain selectively Overweight in the cyclical EMS and Building Material (BM) sectors. Our Overweight in the Utilities is to capture the upside to the economic recovery but also taking into account Tenaga’s ability to surprise with a DPS upside. We remain positive on the Gloves as sector PE valuations are at a 7-year low with above average dividend yields. We also turn Overweight on Technology given the sector’s sustained earnings growth going into 2021, spurred by multiple growth themes. In this report, we also adjust our ratings, earnings and TPs for 14 stocks (see Fig. 51).

A first step into ESG – The top 5 within the KLCI30

In our view, ESG will take on a more a defining role in shaping our investment recommendations as we move into 2021. With growing equity fund allocation towards companies that have better ESG scores and likewise their stronger resilience during macro shocks, this will be an area that can no longer be ignored. Within the KLCI30 companies, CIMB, MISC, Nestle, PChem and Top Glove stand out as the best 5.

Maintain Neutral; introducing our KLCI 2021 year-end target of 1,730

Without much catalysts for the market, we expect the KLCI to trade within a tight trading band. With that, based on our KLCI EPS growth of -0.9% for 2022E and the past-5-year mean PE of 18.6x, we introduce our year-end 2021 target for the KLCI of 1,730. We add Tenaga and MTAG to our Top Buys for 2021 and remove Dialog and Top Glove.

Source: Affin Hwang Research - 11 Dec 2020