RHB Research has joined Maybank IB Research to slash its end-2022 FBM KLCI target to 1,580 points (from 1,670 points previously) after ascribing a lower 15 times (from 16 times) price-to-earnings ratio (P/E) to FY2023 earnings per share (EPS) to reflect the less favourable operating environment going forward.
Sentiment will remain fragile given the potent cocktail of various external and internal macroeconomic threats coupled with domestic political and regulatory worries, according to the research house.
“With global central banks chomping at the bit to make right their misreading of the global inflation picture being the main course, accompanied by the potential for escalating geopolitical risks as an appetiser, a gloomy meal for risk assets seems to be on the menu,” observed head of research Alexander Chia in a strategy note.
“A protracted Ukraine crisis will underpin commodity prices and continue to fuel inflation in 2H 2022. The expectation of an inflation peak has now moved well into 2H 2022 even as multiple rate hikes loom.”
RHB Research expects this alongside the US Fed’s balance sheet deleveraging (QT) to imply at minimum below-trend growth for the US and the global economy in 2023.
Moreover, investors should also keep tabs on the 20th National Congress of the China Communist Party which is expected to endorse a third term for President Xi Jinping.
“With consensus earnings yet to meaningfully adjust lower, the apparent valuation de-rating may be a mirage,” cautioned the research house. “We see downside risks for consensus earnings if expectations for business conditions in 2023 continue to deteriorate.”
RHB has not yet assuming the worst-case scenario as the base case. But the uncertainty of the severity of the slowdown and absence of clear upside risks will keep investors guarded and reluctant to take big bets as forward valuations may be unreliable.
“This suggests that investors will be inclined to hold higher levels of cash and other liquid assets in the interim,” reckoned the research house.
“Key investment attributes to focus on include companies with robust balance sheets, pricing power, ability to pass through higher costs, captive customer bases, and a strong environmental, social and governance (ESG) profile.”
On this note, RHB Research advocates a core defensive stance coupled with a trading mentality. Captive domestic investment funds should seek attractive entry points (nibble on weakness) to build positions.
“We also see selective opportunities in the small cap space,” suggested the research house. “We are ‘overweight’ on banks, non-bank financial institutions, oil & gas (O&G), healthcare, basic materials, gaming and technology.” – July 6, 2022
