Risk-On, Risk-Off: Make Hay While The Sun Shines But…

Shifting expectations for the pace of US monetary policy normalisation and the direction of oil prices continue to influence the MYR, resulting in a resurgence of foreign portfolio funds. While RHB remains cautious on the global and local macroeconomic outlook, we expect policymakers to continue their stimulus programmes to extend the global growth cycle. The expected market volatility going forward would demand the adoption of shorter-term investment horizons by investors. Malaysia remains a tradingmarket where stock-picking would be critical for outperformance.

A confluence of positives. A confluence of positive developments has helped to lift investor sentiment. These include the rebound in commodity prices, further policy easing in Japan, Europe and China in addition to shifting expectations for the pace of interest rate increases in the US. The downward nudge in the federal funds target rate projection at the March Federal Open Market Committee (FOMC) meeting and subsequent dovish comments by the Federal Reserve (Fed) chair have raised the bar for additional rate hikes in 2016, suggesting near-term USD weakness. These positives are also anchored by easing domestic risk premiums.

Foreign flows. After two consecutive years of net selling by foreign institutional funds totalling MYR26.5bn, foreign funds returned to domestic equity markets with a bang. YTD cumulative net buy reached MYR4.25bn, after a slow start to 2016 (January net sell: MYR975m). Drivers of foreign flows include the perceived undervaluation of the MYR and Malaysia being perceived as a safe haven, low beta market. Despite winning the lion’s share of ASEAN inflows in 2016, we are not convinced that this represents a structural shift in foreign money back into Malaysia or a fundamental upgrade of the outlook for Malaysian equities. The recent flows only represent a narrowing of their underweight position.

Slowing domestic growth offers a weak backdrop for equities. Tight government finances from lower oil revenue would translate into slower public spending and more cautious investment trends. Consumer spending would also slow while sluggish global growth would not provide a strong boost for exports. RHB forecasts Malaysia’s real GDP to slow to 3.9% in 2016 (2015: 5%). We note that risks are rising for a premature downturn in the global economy. Stock-picking for outperformance. Amid the clearly weak global macroeconomic fundamentals, we remain cautious but maintain our expectations for continued policy easing by policymakers to extend the global growth cycle. The resulting heightened market volatility would require a trading stance to outperform. With the FBM KLCI already trading at a hair’s breadth away from +1SD to the 10-year mean with downside risk to mid-single digit 2016 earnings growth in a slowing economic growth environment, the P/E-to-growth equation does not look compelling compared to those of our regional peers. While foreign interest has centred mainly on large-cap, blue-chip stocks, we also see value beginning to emerge amongst mid and small caps. We like stocks offering growth with good governance, while high yielding stocks are also attractive in a low growth environment. We see the benchmark index remaining within the 1,650-1,780 pts trading range on the back of ample domestic liquidity. We retain our end-2016 FBM KLCI target of 1,700 pts (15x 1-year forward P/E) although our bottom-up computation now stands at 1,750 pts.

Source: RHB Research - 8 Apr 2016