Summary

• We reduce our end-2022 FBM KLCI target by 5% to 1,500 pts based on 15.5x 2022F earnings (-9.4%), from 1,580 pts based on 16x previously, to reflect the prospect of extended higher interest rates globally that weighs down on equity valuations.

• We project FBM KLCI’s earnings to grow by +11.6% in 2023 backed by: (i) the full-year impact of the reopening of the economy and international borders, (ii) robust domestic demand, and (iii) a low base in 2022 due to Cukai Makmur. We acknowledge that there could be downside risk to our earnings forecast in the event the global economy slips into a sharp slowdown or recession.

• If the current hyperinflationary cycle is to follow the symmetrical pattern in the past (particularly in 1974 and 1979-1980), it may take at least another 12-18 months before the current hyperinflationary cycle in the US (and the world as a whole) could come to an end.

• In Europe, while gas prices have come off by >40% since hitting a peak in August 2022, they are still >10x higher than the levels seen in 2019, resulting in widespread curtailment of production in energy-intensive industries such as steel, aluminium, zinc, fertilizers, cement and pulp & paper.

• Meanwhile, global supply chain disruptions are still far from over with the zero-Covid policy still being in full force in China, more so, ahead of the consequential 20th National Congress of the Chinese Communist Party in mid-October 2022.

• We advocate investors to seek refuge in domestically-driven sectors amidst rising external headwinds. We expect the government policy of strengthening support to domestic demand and economic activities—since the outbreak of Covid-19, through the pandemic recovery phase—will be reinforced in the coming Budget 2023 on 7 October 2022.

• Banks are the best proxy to Malaysia’s resilient economy, in particular, domestic consumption. Similarly, earnings of telcos will be supported by domestic consumption and spared the external headwinds. Meanwhile, auto makers/distributors have strong earnings visibility underpinned by order backlogs sizeable enough to keep them going for the next 7-8 months.

• We believe mid-market retailers will continue to do well given their customer base that is skewed towards the M40 group of which spending power is less impacted by the high inflation given a healthy household balance sheet.

• We believe investors should build position in contractors ahead of the 15th General Election (GE15). There is a strong case for the government to embark on counter-cyclical fiscal pump-priming to shield the economy from the external slowdown.

• Our Overall Top Picks are MAYBANK, PCHEM, CIMB, DIGI, KLK, INARI, GAMUDA, ABMB, BAUTO and AEON.

• Our Top Shariah Picks are PCHEM, DIGI, KLK, TM, INARI, GAMUDA, TAKAFUL, BAUTO, AEON and OCK.

Source: Kenanga Research - 28 Sept 2022