AFTER a RM1.3 bil ‘rout’ in net foreign equity selling in June, AmBank Research expects a return of foreign equity buyers in 2H 2022 notwithstanding the June foreign equity outflows amid emerging bargain valuations and prospects of a stronger 2022 gross domestic product (GDP) growth of 5.6% vs the global rate of 3.6%.
This will be further underpinned by expectations of a stronger ringgit in 2H 2022 with its in-house economist projecting the USD/ringgit exchange rate to strengthen from RM4.40 currently to RM4.20-RM4.25 (consensus: RM4.30) by 4Q 2022 and subsequently improving further to RM4.10-RM4.15 (consensus: RM4.18) in 2023.
“We maintain a base-case end-2022 FBM KLCI target at 1,745, pegged to its five-year median at 16.4 times as both foreign and local investors are likely to switch back to buying positions towards end-2022 amid clearer visibility to 2023F earnings per share (EPS) growth expectations of 8%,” projected analyst Alex Goh in a strategy update.
On the near term, the fund flow volatility could continue to drive the index within a range band of 1,400 to 1,600 as the recent re-opening of international borders and stronger economy may be curtailed by:
- Higher-than-expected US rate hikes;
- Stagflationary worries;
- Earnings volatility amid commodity price swings;
- Further supply chain shocks from Russia being shunned by the global economy;
- Goods and services tax (GST) re-introduction; and
- Political noises running up to the 15th general election (GE15).
“Our worst-case outlook remains on an FBM KLCI drop to 1,415, pegged to 2022 PE of 14.8 times or two standard deviations (SDs) below its five-year median driven by substantive earnings disappointments, fresh outbreaks of new COVID-19 variants, further geopolitical shocks and a reversal of foreign net flows,” noted AmBank Research.
“We maintain a blue-sky FBM KLCI index scenario at 1,820 pegged to 0.5 times SD above its five-year median based on a stronger 2022 GDP growth at 6%.”
Very broadly, the research house reiterated its “overweight” stance on the automobile, banking, media, oil & gas (O&G), ports, power and technology sectors with top “buy” for Malayan Banking Bhd (Maybank), Tenaga Nasional Bhd, CIMB Group Holdings Bhd, RHB Bank Bhd, Berjaya Food Bhd, Telekom Malaysia Bhd, Inari Amertron Bhd, Malaysia Pacific Industries Bhd, Bermaz Auto Bhd and Dialog Group Bhd.
“For dividend stocks, our top five picks with yields of over 6% are Malakoff Corp Bhd, Astro Malaysia Holdings Bhd, Globetronics Technology Bhd, Maybank and YTL REIT,” suggested AmBank Research.
Elsewhere, the research house expects Bank Negara Malaysia (BNM) to raise its overnight policy rate (OPR) by 50 basis points (bps) in July and a subsequent 25bps in September 2022 that will bring the OPR to 2.75% by end-2022.
“Given the aggressive stance of the US Federal Reserve consensus’ expectations of six to seven additional rate hikes this year could elevate the Federal funds rates to 3.50% by end-2022, this could potentially lead to a premium of 75bps against the Malaysian OPR,” added AmBank Research. – July 1, 2022