The KLCI should scale higher in 2H 2014 riding on global liquidity which is likely to stay elevated.

That said, KLCI valuations are also elevated at 2.2x PEG; this would cap a significant re-rating.

We switch to stocks with improved outlooks but which have underperformed; also, the value stocks.

What‟s New

Despite new highs, the KLCI has underperformed in the region in 1H 2014 largely due to its outperformance in 2013 which led to valuations sustained at high levels. Despite the return of foreign funds into the region, their return to Malaysian equities has lagged that of the other developing ASEAN markets and the buying has not been as aggressive as before, we observe.

Corporate earnings growth continued to slow with 1Q14 core net profit of our research universe (74% of Malaysian bourse market cap) up just 3.4% YoY. We now expect KLCI‟s core earnings to grow 7% in 2014 (+8.1% previously) and 8% in 2015 (+8% earlier).

What‟s Our View

We expect policy direction in Malaysia to be quite predictable over the next 6M, refocusing on strengthening the government‟s fiscal position with subsidy rationalisation to continue and on the monetary front, the central bank to act on “restoring imbalances” by raising the benchmark OPR. We would also not be surprised of more tightening measures to slow the growth of household debt.

Externally, while the focus will remain on the US‟ and China‟s macros, and happenings in the Middle East, we expect global liquidity to stay elevated. As the US goes on its “autopilot” QE tapering, a potential large-scale cash injection by the ECB would lead to major central banks‟ balance sheets sustaining at high levels. We do not expect the US to raise interest rates until mid- 2015, beyond 2015 for the ECB

On these considerations, we expect the KLCI to scale higher in 2H 2014. However, with several domestic developments yet to play out which would cap near- to medium-term earnings growth, we do not expect the KLCI to re-rate significantly. Our end-2014 KLCI target is unchanged at 1,940, pegged to 16x 12M forward earnings.

With just a 3% upside to our year-end target, we advise investors to do some switching into stocks whose outlook has improved, but which underperform. We would also continue to focus on the value stocks. Elsewhere despite the Shariah stocks outperformance, we would continue to add more Shariah stocks into our portfolio on any broad market dips. We introduce our top BUY picks for 2H.

Source: Maybank Research - 14 Jul 2014