Malaysian equities to be energised in H1 of 2017

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UOB Kay Hian Malaysia Research expects Malaysian equities to be energised in 1H17 by a firmer ringgit and general election buzz.

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects Malaysian equities to be energised in 1H17 by a firmer ringgit and general election buzz.

However, prospects remain fuzzy for emerging market equities amid rising US interest rates and election results in Eurozone that will likely perpetuate growing protectionism in the Western world, the research house said in its strategy report issued on Friday.

“This suggests more periods of trading volatility, and a more subdued 2H17 for the FBMKLCI. We advocate a trading oriented and larger cap-biased investment strategy for 1H17, with focus on strong US Dollar beneficiaries, infrastructure, E&E and capital management themes,” it said.

The research house said 2017 could be a tale of two halves for Malaysian equities, with the FBM KLCI potentially delivering some buzz in 1H17.

Catalysts include: a) a firmer ringgit outlook, led by improving soft commodity prices (especially crude oil prices) and the central bank’s recent requirement for exporters to retain a substantial proportion of export proceeds in ringgit, b) the market pricing in a potential general election in 1H17, and c) modest resumption of corporate earnings growth after four consecutive years of zero or contracting corporate earnings.

“Our ringgit view takes into account an improving outlook for the country’s balance of payment and fiscal health, and we do not foresee an exodus from the heavily foreign owned Malaysian Government Securities (MGS), with foreign holdings equivalent to about 45% of Malaysia’s foreign reserves,” it pointed out.

The FBM KLCI could stretch to the 1,750-1,800 level in 1H17 before easing back to the 1,730 level at end-17, as investors re-focus on Malaysia’s fuzzy long-term economic and corporate earnings trends.

UOB Kay Hian Research said nevertheless, the end-17 level still implies a valuation premium (+0.5SD) to the historical mean price-to-earnings (PE) of 14.8 times, after taking into account domestic liquidity.

“Our end-2017 target is consistent with the bottom up-derived target of 1,740,” it said.

The research house’s investment themes in 2017 include: a) infrastructure and building material plays, b) strong US dollar beneficiaries, c) electronic & electrical (E&E) trend riders, and d) capital management/high dividend yielders.

Under the second theme, it likes the outsourced semiconductor and test (OSAT) and electronics manufacturing services (EMS) subsectors.
Other investment themes include China-related investments and rising demand for Syariah compliant stocks.

“Our top picks include large caps BIMB Holdings, Gamuda, Genting Bhd, Tenaga Nasional and small/mid caps Ann Joo Resources, Bumi Armada, Ekovest, Hume Industries, Kerjaya Prospek Group, Kim Loong Resources, MRCB-Quill REIT and VS Industry,” it said.

Elaborating on the investment themes in 2017, it said they include: a) infrastructure and building material plays, b) strong US dollar beneficiaries, c) E&E trend riders, and d) capital management/high dividend plays.

The first theme, which partly depends on China’s FDI, remains undiluted by China’s recent capital control that does not curtail government-supported strategic investments in Malaysia, which include the various mega infrastructure and the Bandar Malaysia projects.

Under the second and third theme, UOB Kay Hian Research likes the OSAT and EMS segments.

Both of these export segments benefit from a currency kicker on top of rising demand (OSAT to benefit from a strong replacement cycle for Apple’s iPhone 8, the EMS segment to benefit from premium consumer electrical appliance manufacturer Dyson’s successful product portfolio expansion).

For the fourth theme, under its relatively benign interest rate scenario, capital management plays and quality high dividend yielders (selective REITs) should continue to appeal.

Beneficiaries include Ekovest (infra-related), Top Glove (strong US dollar), Inari and VS Industry (E&E), and Kim Loong (capital management).