Executive Summary

Emerging from a lost decade caused by the 1MDB debacle, domestic political upheavals and Covid-19 public health crisis, the FBMKLCI is poised to sustain its upward trajectory after it gained 135.43 points or 9.3% to 1,590.09 in the 1H24. The newfound strength, which is supported by a stable and committed government, rests on 1) improving economic outlook, 2) confidence in domestic fiscal consolidation and structural reforms, 3) spillover effects from sizeable public spending, 4) steady inflow of FDIs in growth sectors, 5) a double-digit growth in corporate earnings, and 6) undemanding valuation. While maintaining our end-2024 target of 1,690 based on CY25 PER of 14.4x, we are optimistic that Malaysia has the right ingredients to propel the FBMKLCI to a new all-time high before the next general election, consistent with our view that it is currently mid-way through a major bull cycle. This will effectively narrow the valuation gap with the 5-year historical average PER of 17.6x as Malaysia’s structural reforms gain traction and foreign funds increase their exposure in undervalued emerging markets with strong growth prospects. The timing may be just right for them to switch gradually from pricy developed markets, especially the US, whose economy is expected to slow down and be subjected to greater uncertainty post the presidential election, especially if Donald Trump is re-elected.

• The Domestic Economy Outperformed in 1Q24. The 4.2% YoY growth surpassed advanced estimates and consensus expectations of 3.9% YoY. Although a little lower than our forecast of 4.3% YoY, it is a good start towards achieving our full-year growth forecast of 4.7%, which can be surpassed, driven by strong consumption, resilient domestic activities and recovery in exports.

• Strong Corporate Earnings. Brighter economic prospects underscore our double-digit earnings growth projection of 13.6% for the FBMKLCI component stocks in 2024 and a high single-digit expansion of 7.8% in 2025. It will be driven mainly by the Banking, Power & Utilities, Gaming, Healthcare and Oil & Gas sectors, which, in our view, have more legs to drive up this equity market rally based on their still undemanding valuations compared to historical peaks.

• Nation’s Strategic Initiatives Positive for Growth. The Malaysian government’s vision to achieve a developed nation status through various long-term strategies that emphasise on growth sectors, digital economy, sustainable development, structural reforms and human capital development are attracting greater foreign direct investments. We are positive about the spillover effects on the domestic direct investments, exports and the overall economy.

• Daring but Much Needed Fiscal Prudence. Foresee greater traction in the government’s fiscal initiatives in the coming quarters as the targeted fuel subsidy rationalisation kicks off with an RM1.20/litre increase in diesel prices. Adjustments in petrol prices will follow soon. While consumption could suffer in the short term, savings from these initiatives should help lower the fiscal deficit and channel some of it to the needy. Withdrawals from EPF account 3, higher civil servants’ pay and the implementation of progressive wages in the private sector are important catalysts for consumption during the adjustment period of subsidy rationalisation.

• Monetary Accommodation. Malaysia’s stronger economy and stable interest rate, resting on our presumption that BNM is likely to maintain its policy rate at 3% for the rest of 2024, should paint a better outlook for Ringgit and draw back foreigners whose current shareholding is low at 19.6%.

• External Sector. Signs of improvement in China’s economy and the government’s measures to revive the ailing property market are seen in a positive light. While trade disputes with the US and Europe could be detrimental to China’s exports, Malaysia will benefit from the global supply chain diversification efforts. In this regard, we view the recent launch of the National Semiconductor Strategy as a vital catalyst to move up the product value chain.

• Downside risks. On the downside, delays in the timing of interest rate cuts and an economic slowdown in the US could affect market sentiment and foreign fund flows into domestic equities. However, with signs of easing in hiring, falling wage growth and a slowing economy, we believe the Fed will be inclined to lower rates in September or by November at the latest. Donald Trump’s re-election may cause some volatility in financial markets, but nothing much will change on trade protectionism even if Democrats prevail in the Presidential Election.

• Investment Strategy – Buy This Market. Savings from government subsidy rationalisation, multi-billion public spending on infrastructures, foreign direct investments and domestic direct investments in renewable energy and growth sectors identified under the long-term plans are boosters for domestic sectors. Thus, our top picks are closely associated with the Banking, Construction, Consumer, Healthcare, Power, Property and Telco sectors. The strong growth in the E&E exports driven by the “China Plus One” strategy and demand for advanced technologies, electric vehicles, data centres, etc. are expected to sustain interest in the Technology sector while benefitting Power and Telco players as well.

• Buy Picks. In line with the above views, our top big-cap picks are PBBANK, YTLPOWR, TM, GAMUDA, INARI and IOIPG. Top small and mid-cap stocks are INTA, PGF, IBRACO, ABLEGLOB, SCOMNET, FFB, SUNCON, ABMB and SIMEPROP

Source: TA Research - 2 Jul 2024