We envisage a better 2019 as compared with 2018. We project an end-2019 FBM KLCI target of 1,820pts based on 18.5x our projected 2019 FBM KLCI earnings. We forecast FBM KLCI’s earnings to grow by 4.0% in 2019 underpinned by a GDP growth of 4.5%.

We believe the key catalyst to the local equity market in 2019 will be the return of global investors to the emerging markets, on a growing consensus that the US rate hike cycle and hence the USD upcycle are tapering off. In fact, the return of global investors to the emerging markets has started since October 2018. Despite the turmoil in the global financial markets in 4Q2018, emerging market equity funds have consistently attracted net inflows over the last eight weeks.

Locally, a number of key sectors have been impacted by policy changes after the 14th general election (GE14) including telcos (reduction in broadband rates), construction (cutback in public infrastructure projects, renegotiation of existing contracts), gaming (higher casino taxes) and power (discrepancy in fuel cost pass-through). Also, the government’s plan to monetise assets to pare down the national debt has given rise to a share overhang concern in the market, as Malaysia’s sovereign wealth fund Khazanah Nasional holds substantial stakes in various blue-chip counters such as CIMB, Axiata, Telekom, IHH and Malaysia Airports.

With the economy being slowly but surely cleansed of rampant corruption, we believe Corporate Malaysia will stand a much better chance of realising its full potential. The best proxy to the “New Malaysia” is none other than the banks which we pick — Public Bank, Maybank and RHB Bank. The abolishment of the 6% GST (partially offset by the implementation of the SST), reintroduction of petrol subsidy and capping of the electricity tariff for the domestic sector have effectively put more money back to the pockets of consumers. For exposure to consumer spending, we like Berjaya Food and Bermaz Auto.

We like exporters who benefit from stable external demand and USD proceeds. They are also less vulnerable to changes in domestic government policies. Our picks are Top Glove and Inari Amertron. Against a backdrop of stabilising crude oil prices, we favour defensive oil & gas names Serba Dinamik and Dialog. We are impressed by Sunway Bhd’s ability to consistently generate property sales despite the challenging market thanks to the right products in highly sought-after locations.

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