Summary

• We reduce our end-2022 FBM KLCI target to 1,610 pts (from 1,670 pts) based on 16x our 2022F earnings projection (-4.7%) against a backdrop of a considerably more aggressive monetary tightening by major policy makers globally in recent months.

• With inflation seemingly spinning out of control, policy makers have no choice but to make reining in inflation their top priority by raising rates and embarking on quantitative tightening, inevitably at the expense of growth (or even driving the global economy into a recession) and asset prices.

• While EM assets generally do not do well during a rate hike cycle in the US, we see an exception this time around as the current US rate hike cycle coincides with a super boom in commodity prices, which augurs well for the generally commodity export dependent EM. Also, EM now appears a safer bet vs. Europe given the Russia Ukraine war situation.

• Within the EM space, there has been a shift in focus away from China (on the heels of regulatory crackdowns, a tech selloff, an ineffective zero Covid-19 policy and an ambiguous stance in the Russia-Ukraine war) while Russia has been completely removed from MSCI EM Index in the wake of the war. These have resulted in a corresponding rise in weighting for other countries in the index, including Malaysia.

• Under the current sustained high inflation scenario, we believe investors should seek refuge in stocks of companies with strong pricing power. We acknowledge that these are rare in our market, but we believe there are no lack of “near-proxies” for pricing power, which we define as “companies that are able to maintain their margins despite the rising cost pressures”.

• We see them in: (1) Service-based industries that have kept wage pressures at bay, i.e. Banks and Telecommunications players; (2) Suppliers to multinational companies with pricing power, predominantly in the tech/consumer electronics space (which means there are less cost pressures to be passed on along the supply chain), i.e. local players in the fields of Outsourced Semiconductor Assembly and Test (OSAT), Automated Test Equipment (ATE) and Electronics Manufacturing Services (EMS); and (3) Providers of goods/services with a low “price elasticity of demand” such as Private Healthcare.

• We also like commodity producers, i.e. strong names in the Plantation and Oil & Gas space as we expect CPO and crude oil prices to stay elevated in 2H 2022. We hold the view that the time is about right for investors to position themselves in Construction stocks ahead of the 15th General Election (GE15). 

• Our Overall Top Picks are MAYBANK, PCHEM, IHH, KLK, RHBBANK, DIGI, INARI, GAMUDA, ABMB and PIE.

• Our Top Shariah Picks are PCHEM, IHH, KLK, DIGI, TM, INARI, GAMUDA, TAKAFUL, BPLANT and PIE.

Source: Kenanga Research - 28 Jun 2022