• Still optimistic despite some uncertainties. The volatility cloud we identified in the preceding quarter looks likely to accompany investors into 2025 as the new US policy package gradually crystallises. This will be offset by the conducive domestic environment, decent prospects for corporate earnings, undemanding equity valuations and robust liquidity conditions. Global macroeconomic conditions remain supportive of risk assets, with RHB Economics pencilling in US Federal Funds Rate (FFR) cuts totalling 75bps in 2025. Our investment strategy centres on accumulating quality stocks on weakness with an initial focus on large caps.
• Global macroeconomic base case still solid. The RHB house view calls for global growth to remain resilient with the US and China GDP growth to expand at 2% and 4.8% respectively in 2025. Forecasts for a cumulative 75bps reduction in the FFR should nominally bring about an easier USD from narrowing interest rate differentials. We note some initial policy overhang following Donald Trump's re-election on the back of his controversial campaign rhetoric and considering the manner in which the first Trump administration was conducted. Geopolitical risks remain on a knife's edge and could add to global inflation risks.
• Domestic drivers remain intact. Malaysia's economy continues to expanding at a healthy clip, due to external and internal growth drivers. The impending formalisation of the Johor-Singapore Special Economic Zone (JS-SEZ) will create new growth opportunities in the southern region. Stable domestic politics and continued emphasis on reform will support domestic investor sentiment. The more resilient corporate earnings outlook and the equity market's consolidation have brought valuations to undemanding levels, with forward P/E at just 14.3x after rolling forward the base year to 2026.
• Strategy. External volatility will be offset by domestic stability and bolstered by ample liquidity, steady corporate earnings and attractive valuations. We observe strong support for the FBM KLCI at the 1,590-pt level and accordingly, the absolute downside looks limited. Investment inflows and the domestic-centric investment strategies by local institutions will be supportive of domestic business conditions, risk assets and market valuation. We believe investment risks are better managed by being invested and well positioned for growth focusing on accumulating fundamentally robust, quality names. We introduce our end-2025 FBM KLCI target of 1,820 pts (16x target P/E) on forward FY26F earnings. The target P/E is a premium to the long-term mean valuation of about 15x to reflect healthy liquidity conditions. We are OVERWEIGHT on banks, property, construction, plantation, technology, healthcare, basic materials, oil & gas, utilities and rubber products. Key risks include unpredictable geopolitical developments and a fallout from an escalation of the US-China trade war that could impact Malaysia.

Source: RHB Research - 12 Dec 2024