In a nutshell, our story to Go Long is short and simple. We believe the impact of war to equity markets is usually short-lived, looking at historical war events. While no two wars are exactly the same, historical precedents guide for decent market rebound following initial knee-jerk sell-offs. We are also less concerned over the trend of steeper interest rate as BNM is committed to keeping a neutral stance on OPR in favour of minimising disruptions to the nascent economic recovery, and price stability. This coupled with the reopening of borders on April 1 concurrently with transition to endemic phase has casted positive expectations on economic recovery and improvement in corporate earnings. We maintain our FBMKLCI’s FY22E/23E earnings growth estimates of -0.3%/12.2%. We also keep our FBMKLCI’s year-end target at 1,670, which implies a FY22E PER of 15.0x. Top Picks for the quarter include AEON (TP: RM1.70), DAYANG (TP: RM1.00), D&O (TP: RM5.60), KGB (TP: RM1.90), KLK (TP: RM30.00), HLBANK (TP: RM22.70), PADINI (TP: RM3.80), RHBBANK (TP: RM6.95), TSH (TP: RM2.08) and UZMA (TP: RM0.680).

U.S. interest rate hike – The 1st market dampener. In mid-March 2022, the Fed approved a 0.25 percentage point rate hike - the first increase since December 2018. U.S. officials indicated an aggressive path ahead, with rate hikes coming at each of the remaining six meetings in 2022. Members of FOMC also pared expectations for economic growth this year and sharply raised their inflation outlook. The expectation of further interest rate hike has somewhat triggered some stock sell-downs, especially the technology and semiconductor stocks in late-Feb 2022 and early-Mar 2022. YTD, the KL Technology Index dipped 20% YTD as opposed to 38.5% gains for the same period of time back in 2021. Back home, BNM is committed to keeping a neutral stance on OPR in favour of minimising disruptions to the nascent economic recovery and pricing stability. As such, our economist team expects a rate hike of up to 50bps in 2H2022.

War – The 2nd market dampener. While uncertainties are spawning from the Russia-Ukraine war, albeit not materially impactful to our local economy thanks to the country not being big trade partners with the affected region, we believe the impact of war to equity markets is likely short-lived as per historical war events. Historically speaking, following initial knee-jerk sell-offs triggered at the start of war, stock markets had normally rebounded subsequently. Besides, we also notice such sell-downs before meaningful recovery in the benchmark index. Of course, the key assumption here is that the perceived worst impact from the war event is drawing to a close when it appears clearly that the conflicts are not expected to spread and be prolonged. Based on past precedent, such sell-offs could last for as short as a month to the longest of approximately four months (please refer to Appendix 1 for more details).

Looking at the bright side, we do see some favourable trends emerging despite the above-mentioned drawbacks.

• The fact that Malaysia is in the midst of transition to an endemic phase with further relaxation of Covid- 19 restriction measures by today -1 April 2022. This will further strengthen the expectation of local economic recovery as well as corporate earnings especially for Retail and Tourism industry players.
• Besides, with the expectations of interest rate hike, and coupled with high oil prices, the return of foreign investors is likely. In fact, in the month of March 2022, foreign funds were returning as net buyers after a long absence.
• The elevated crude oil and crude palm oil prices could also serve as market catalysts should the price rally is proven sustainable. Already we saw KL Plantation Index surging 21.1%(QTD) in 1Q22. However, KL Energy Index merely went up by 2.35% (QTD) in the same quarter. Besides, the stronger-han-expected commodities rally has also prompted us to revise our average CPO price assumptions to RM4,000/MT in 2022 and RM3,500/MT in 2023 (from RM3,500 and RM3,000 respectively). In fact, we believe there is room for further upgrade to RM4,500-RM4,000/MT should the CPO price trend prove resilient. And, at the same time, our average Brent Crude Oil price assumptions have also been revised to USD90/barrel from USD65/barrel for both 2022 and 2023.
• At the same time, there are market talks that the 15th Malaysian General Election (GE15), which is originally scheduled to be held on or before July 2023, may be held this year. This has built up the expectations of more contract announcements i.e. MRT3 Circle Line project and Johor Bahru– Singapore Rapid Transit System (RTS) link. With the recent news flow of these projects, the KL Construction Index jumped 4.3%YTD after a decline of 17.6% for the same period of time back in 2021.
• Let the numbers do the talking. Talks and expectations aside, the strongest support to our cautiously optimistic stance is the improving corporate earnings. Recall that in the just concluded 4QCY21 results season, out of the 129 stocks under our coverage that reported results, 31% beat expectations, 43% were within and only 26% came in below par. Sector-wise, automotive, media, healthcare, plantation and banking sectors surprised on the upside while building materials and gaming missed expectations.

We are now maintaining our FBMKLCI earnings growth forecasts of -0.3% for CY22 (negative despite recovery due to Cukai Makmur vs. -8.1% in 1QCY22) and 12.2% for CY23 (vs. 11.2% in 1QCY22). In terms of index target, we also stand firm at 1,670, implying a FY22E PER of 15.0x.

2QCY22 sector calls. The upgrade in earnings estimates is also reflected in our sector calls as well. As opposed to 1QCY22, we have upgraded Banking, Packaging Manufacturers as well as Ports & Logistics to OVERWEIGHT. In fact, the average analyst rating of the team has improved and is approaching the 2- year high (please refer to Appendix 3 for more details). The brief comments for these respective sectors are tabled in Figure 1 & 2 of Appendix 4.

Source: Kenanga Research - 1 Apr 2022