Donald Trump has won the US presidential election with 295 strong votes and his Republican party looks set to take control of the Congress after snatching the Senate from Democrats with 52 seats versus that latter’s 44 and leading in the House of Representatives (202 vs 186) as the vote counting is still going on. Trump’s probusiness policies and pledge for expansionary fiscal policies, mainly in the form of tax cuts, are positive for US corporations and its equity markets.

Contrary to market expectations, the FBMKLCI has reacted positively to Trump’s winning yesterday. It closed as its day’s high of 1,634.17 despite widespread concerns that his isolationist and protectionist policies to make the US great again may dampen trade and the global economic growth. He has not only promised to slap a 60% tax on all imports from China but also phase out Chinese imports within four years, ban Chinese investments in the US, block China’s access to American technology sectors and impose a 10% -20% tariff on all imports, if elected as president.

The move is akin to shooting in the foot as the US is not a self-sufficient economy to produce everything. The move will undoubtedly disrupt the supply chain, affect competitiveness and increase the cost of doing business. Prices of goods and services will rise to offset higher costs, and the inflationary pressure will affect consumer confidence and demand. Tit-for-tat reactions from affected nations will have chain effects on global trade and push the economy into greater uncertainty. Nonetheless, his pledge to end war in the Middle East and Ukraine can be viewed positively and could help contain inflation, if he succeeds.

Talking about the US economy, Trump did not disappoint during his last presidency. The average annual growth rate was 2.3% between January 2017 to January 2021 when Trump was the president. It was affected by two quarters of contraction in 2020 due to Covid 19 but rebounded sharply after that due to stimulus measures. It improved slightly so far under Biden’s administration with an average growth of 2.6%. Inflation is still high under the current administration compared to Trump’s presidency. It was at 2.5% in January 2017 and 1.4% when Trump left, contributing to higher average weekly earnings after adjusting for inflation. In October 2024, the consumer price index was at 2.4%. The unemployment rate was at 3.5% pre-Covid and 6.4% when Trump left after hitting a high of 14.9% in April 2020 due to Covid shutdowns. It was at 4.1% in October 2024.

Key sectors that could be affected because of trade war are semiconductors, electric vehicles, solar panels, advanced manufacturing, etc. However, the implementation of higher tariffs may not be immediate as Trump’s intention is to strike a better deal with countries that the US has high trade deficits. Thus, the implementation timeline may roll into 2H25. In the interim period, trade may thrive as buyers stock up for rainy days. This should benefit ports (WPRTS, Hold, TP:RM4.86) and logistics CJCEN (Sell, TP:RM0.31) players.

As highlighted in our last Monday weekly and 4Q24 strategy reports ( https://taresearch.taonline.com.my/rrs/files/2024/10/4Q2024_20241003.pdf ) renewable energy, oil and gas COASTAL (Buy, TP:RM1.89), LCTITAN (Sell, TP:RM1.02), MHB (Buy, TP:RM0.61), MISC (Hold, TP:RM9.24), PANTECH (Buy, TP:RM1.17), PCHEM (Buy, TP:RM6.93) and VELESTO (Buy, TP:RM0.30), and exporters like Technology stocks may face some selling pressure, pending more details on the tariff front. Nonetheless, these stocks are expected to recover from any initial setback in sentiment due to "China plus one" strategy. PC replacement cycle that should start next year with Microsoft ending support for Windows 10 is a strong catalyst for Tech sector, especially semiconductor INARI (Buy, TP:RM4.10), UNISEM (Buy, TP:RM3.62), MPI, Buy, TP:RM38.20) and ELSOFT (Buy, TP:RM0.58) players. The impact on renewable energy players like Samaiden (Buy, TP:RM1.30) that focuses on domestic business and EPCC could be minimal or even positive as they stand to benefit from cheaper solar panel prices because higher US tariffs could lead to price dumping in this part of the world as producers try to make up for the lower US demand.

Besides, as Trump’s policies are expected to eventually push up inflation when he starts to implement his election promises after assuming office on 20 January 2025, the possibilities for the US Federal Reserve delaying its easing bias or turning more hawkish are high. This paints a stronger outlook for the USD versus the Ringgit. Recall that in our recent report “Ringgit Strengthening and Its Impact” issued on 30 October, ( https://taresearch.taonline.com.my/rrs/files/2024/10/Malaysian_TMR_20241030.pdf ) , we have highlighted automotive, banking, construction, gaming, healthcare, oil & gas, plantation, and technology sectors as key beneficiaries of Ringgit weakening. Based on our analysis, for every 5% weakening in the Ringgit net earnings will increase by 1.4% for our stock universe and 1.9% for FBMKLCI component stocks under our coverage. Thus, from a valuation perspective, any downside pressure on the FBMKLCI will only make it more attractive for investors.

Akin to what transpired after Trump’s victory in 2016, we may witness some downside pressure on the FBMKLCI in the short-term but recall that the benchmark index has started recovering after one month and witnessed an uninterrupted rally for the next five months. It held on to its gains in 2017 before retesting the all-time high of 1,896 in April 2018. Thus, we won’t regard Trump’s victory negatively and view any weakness as a buying opportunity despite the short-term market volatility, which could be driven by US policy uncertainties, especially with regards to trade and foreign relations.

Maintain our end 2024 FBMKLCI target at 1,690 based on CY25 PER of 14.6x. We remain optimistic about Malaysia’s prospects due to the government’s 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. Thus, no change in our top picks in the Banking, Construction, Consumer, Healthcare, Power, Property and Telco sectors that will benefit from these initiatives. Buy CDB (TP:RM4.58), CIMB (TP:RM9.48), GAMUDA (TP:RM10.98), IJM (TP:RM4.00), INARI (TP:RM4.10), IOIPG (TP:RM3.02), MAYBANK (TP:RM11.85), PBBANK(TP:RM5.36), SIMEPROP (TP:RM2.00), TENAGA (TP:RM17.30), TM (TP:RM7.93) and YTLPOWR (TP:RM6.39). Top small and mid-cap stocks are ABMB (TP:RM5.00), FOCUSP (TP:RM1.11), IBRACO (TP:RM1.36), MAHSING (TP:RM2.40), PADINI (TP:RM4.30), PGF (TP:RM2.76), SCOMNET (TP:RM1.73) and SUNCON (TP:RM6.68).

Source: TA Research - 7 Nov 2024