Summary

• We maintain our end-CY23 FBM KLCI target of 1,610 pts based on 15.5x our projected FBMKLCI CY23F earnings (+10.5%), at a discount to its 5-year historical average of 18x to reflect valuation compression across asset classes on the heels of aggressive monetary tightening by major policy makers globally since CY22.

• We believe the market in 2QCY23 will continue to be beset by a lack of conviction, both to buy, and to a certain extent, to sell, similar to what happened during the greater part of 1QCY23.

• Globally, investors are still awaiting the elusive signs of inflation finally being reined in. Complicating the situation are mixed signals from the continued strength in the US economy (especially, the labour market, and to a certain extent, consumer spending), and the recent banking crisis in the US and Europe.

• Locally, while the new government continues to advance its policy reform agenda in favour of a more progressive, pro-consumer, pro-competition and free-market approach, it will do so at a more measured pace and subtle way, ahead of the six state elections that are widely expected to be held in Jun 2023.

• We are taking a page from the playbook of 1QCY23, as we believe 2QCY23 is likely to pan out like 1QCY23. Our top sector picks are telcos, banks, construction, retailers and automakers/distributors.

• Telco stocks stood out in 1QCY23 thanks to their earnings resilience with telecommunications services having evolved into a basic necessity of modern life. We believe telco stocks will continue to do well in 2QCY23 for the same reason. In addition, the sector could be poised for a major re-rating if the new government reviews the current single wholesale network (SWN)model for the 5G roll-out to promote competition and innovation.

• We believe the sell-down on banking stocks in 1QCY23, on the heels of the banking crisis in the US and Europe, was unjustified. The banking crisis in the US, particularly has been sparked off largely by the massive losses in the bond portfolio of US banks due to a steep 475bps jump in the Fed funds rate in just slightly over a year. During the same period, the Overnight Policy Rate (OPR) of Bank Negara Malaysia (BNM) only increased by 100bps.

• We expect a more broad-based re-rating of the construction sector in 2QCY23 after a modest 1QCY23 almost solely carried by GAMUDA’s strong share price performance. We expect roll out of more public infrastructure projects led by flood mitigation projects and MRT3.

• Despite sustained high inflation, we expect consumer spending to stay resilient in the absence of any immediate plan by the government to rationalise subsidies or reintroduce the GST. This augurs well for retailers and auto makers/distributors.

• Our overall top picks are PBBANK, CDB, MAXIS, RHBBANK, KLK, GAMUDA, KPJ, BAUTO, SUNCON and AEON.

• Our top Shariah picks are CDB, MAXIS, KLK, GAMUDA, KPJ, BAUTO, PADINI, SUNCON, AEON and MBMR.

Source: Kenanga Research - 30 Mar 2023