■ We expect 2018 to be a more volatile and challenging year for the Malaysian market compared to 2017.
■ The key challenges include slower GDP growth in 2018, potential cost pressures for businesses, impact from disruptive technologies, and potential earnings risks.
■ We expect these concerns to be priced-in in 1H18, and the market should improve in 2H18 due to stronger fund flows, better corporate earnings, and IPO activities.
■ We have identified five themes for 2018: 1) beneficiaries of ringgit strength; (2) GE14 plays; (3) BRI and rail theme; (4) PNB transformation; and (5) small-mid cap sectors.
■ We lower our KLCI index target for end-2018 to 1,880 from 1,920, based on 15.9x forward P/E (in line with its 3-year mean) after adjusting for the new KLCI constituents.
■ We prefer construction, utilities, oil and gas, gloves and small-mid cap sectors for 2018.
■ Top three picks for 2018 are Axiata, Dialog and Tenaga.
More challenging and volatile 2018?
We expect 2018 to be a more volatile and challenging year for the Malaysian market compared to 2017. We expect the market to be choppy in 1H18, before rising in 2H18. The key challenges include slower GDP growth in 2018, potential cost pressures for Malaysian businesses, impact from disruptive technologies and potential earnings risks for banks and utilities due to changes in accounting standards (MFRS9 for banks) and
regulations (utilities).
RMUSD exchange rate
Opportunities beckon in 2H18
We expect the market to price in most of the above concerns in 1H18, and local and foreign direct investments should improve in 2H18, post-GE14. Factors that could boost market prospects in 2H18 are: (1) potential relief rally and increased foreign funds inflow into Malaysia post GE14; (2) better corporate earnings; (3) slew of construction job awards and potential Chinese investments; and (4) IPO activities picking up pace post
GE14 in 2018.
Five key themes for 2018
We have identified five themes for 2018: 1) beneficiaries of ringgit strength – auto, airlines and consumer sectors; (2) GE14 plays – government-linked companies; (3) China’s Belt Road Initiative (BRI) and rail theme – construction; (4) PNB transformation – plantation and property; (5) small-mid cap sectors – small-mid cap stocks.
Our top sector picks
Our top sector picks are construction, utilities, rubber gloves, oil and gas, and small caps. We like utilities for their defensive earnings, construction for potential job rollouts and award of projects, rubber gloves for strong demand growth, oil and gas for the earnings
recovery story, and small caps for Bursa’s on-going research scheme to discover
undervalued gems.
Preferred stocks
Our top big cap picks are Tenaga Nasional for utilities exposure, Dialog for its robust earnings growth, and Axiata on our expectation of an earnings rebound in 2018 and 2019. Our top 3 smaller caps are CCK on its plan to improve its margin by moving into a more profitable product mix as well as a beneficiary of the stronger ringgit, Berjaya Food on its plans to dispose its loss-making overseas entities as well as benefitting from a stronger ringgit, and Bonia on earnings recovery from closure of loss-making boutiques.
Maintain 2017 KLCI target but lower 2018 target to 1,880 points
We reiterate our end-2017 KLCI target of 1,790 pts based on 16x P/E, which is in line with its three-year moving average. However, we lower our 2018 target from 1,920 to 1,880 to reflect recent changes in KLCI constituents. We project that market earnings will rebound by 6% in 2017 and 2018 before accelerating to 9% in 2019.
