The Dec 2015 earnings quarter was broadly in line, although earnings revisions were mainly negative. FY16 earnings were trimmed by 1.2% YoY. Recent risk appetite appears to have improved – helped by easing domestic risk premiums that have led to the MYR finding a floor, while developments in the crude oil market have allowed oil prices to stabilise, helping to generate trading opportunities. However, upside may be tempered by rich valuations, lacklustre earnings growth while other ASEAN markets are a more compelling proposition for foreign institutions.

Results broadly in line. The Dec 2015 quarter results were generally in line, although the ratio of misses to beats improved to 1.2x (3Q15: 1.6x) and is the lowest seen in two years. Nonetheless, earnings revisions continued to be negative, with FY16 earnings trimmed by 1.2% YoY – with the biggest cuts coming from the healthcare, plantations, telecoms and auto sectors. Four of 21 sectors disappointed overall (auto, media, aviation and healthcare) while the remainder were in line. No individual sector surprised on the upside. Large caps in line. Of the 25 FBM KLCI component stocks under our coverage, most (64%) reported earnings in line with expectations although 24% disappointed. The misses include Sime Darby, IHH, Petronas Gas, Hong Leong Bank, UMW and KLCC REIT while Public Bank, Genting and Telekom beat expectations. Component stock earnings were cut by 1.6%, with the biggest absolute earnings reductions coming from HL Bank and IHH. Following these earnings revisions we now estimate FY16 KLCI earnings growth at 7.5% compared with the 8.4% seen in our recent 2016 strategy and market outlook report (Malaysia Strategy 2016 - Volatile Volatility: The New Normal In a Low Growth World).

Consumer sector upgraded, healthcare downgraded. Following the changes in stock calls on the back of the recently-concluded reporting season, we downgrade the healthcare sector to NEUTRAL (from Overweight) on the back of IHH’s results that disappointed. The consumer sector was raised to NEUTRAL (from Underweight) after upgrades to Carlsberg, Guiness and Old Town. Still a trading market. The recent improvement in risk appetite has been driven by easing domestic risk premiums and the stabilisation of crude oil prices. This has helped the MYR find a floor, resulting in the export theme coming to an abrupt end for now. The hope that foreign institutional interest will return is predicated on their underweight position in Malaysia and the depreciation of the MYR. YTD, foreign institutions remain net sellers (MYR405m) but were net buyers in February (MYR571m). We continue to see trading opportunities for the market – although expectations could be tempered by rich valuations and lacklustre corporate earnings growth. Within ASEAN, investor interest appears to be weighted toward Indonesia and Thailand. In the meantime, the impending appointment of a new Bank Negara governor is a near-term risk.

Source: RHB Research - 2 Mar 2016