This article first appeared in The Edge Financial Daily on July 5, 2018
KUALA LUMPUR: Expectations of continued volatility in local equities in the second half of the year (2H18), driven by external headwinds and pending clarity on longer-term government policy direction, have prompted Maybank IB Research to revise downward its end-2018 FBM KLCI target to 1,750 points from 1,840 points, to better reflect the risk factors.
In its Tuesday strategy note authored by Suhaimi Ilias and Wong Chew Hann, Maybank IB Research said the FBM KLCI target of 1,750 points is based on 15.6 times forward price-earnings-ratio (PER). It also expects range-bound trading for the most of 2H18.
On a positive note, the research house said optimism about Budget 2019, and the new government’s commitment to strengthening its finances and stepping up governance, accountability and transparency, will serve as potential catalysts to drive the FBM KLCI higher.
“We would not be surprised at foreign flows turning positive again, after Budget 2019 realistically reassures on the country’s macro growth and addresses the government’s fiscal target. Thereafter, prudent economic management should see long-term investors returning,” it said.
Meanwhile, in view of external headwinds and uncertainty over domestic political events, Maybank IB Research also trimmed its 2018 gross domestic product (GDP) growth forecast for Malaysia to 5.1% from 5.3%.
“We trim our 2018 real GDP growth forecast to +5.1% from +5.3% previously as we adjust the growth forecasts for the supply and demand components of GDP to factor in year-to-date data and the impact of measures announced so far by the new Pakatan Harapan government.
“We see growth moderating further to +4.9% in 2019, given the outlook for slower global economic growth that will affect Malaysia’s external trade growth performance, as well as the implications of the Pakatan government’s policies on the dynamics of domestic demand growth,” Maybank IB Research said.
While noting that global economic growth sustained its momentum in 1H18, the global composite purchasing manager’s index has plateaued, signalling “toppish” economic growth.
Maybank IB Research said world economic growth is expected to moderate to 3.9% in 2H18, against a 4% growth in 1H18, and further decelerate to 3.9% in 2019.
It noted growing risks and headwinds to global growth in terms of rising interest rates globally, spearheaded by the US Federal Reserve’s ongoing interest rate hikes, compounded by the beginning of the end of the major central banks’ quantitative easing policy. These in turn are causing volatility and corrections in financial markets due to the repricing of growth and policy outlook.
“There are also signs of China’s economy slowing due to the impact of ‘deleveraging and de-risking’ policy. The global economic outlook is also clouded by the US’ trade tension with China that has spread to other US key trading partners, namely the EU (European Union), Canada and Mexico,” it added.
Given these factors, external markets are expected to remain volatile in 2H18 on multiple risk factors and pressure points. Maybank IB Research noted that a full-blown global trade war has not been fully priced in but said that this is not its base case either.
“That said, rhetoric will continue [as a tactic for negotiation] inviting counter-retaliation; these noises will continue to destabilise markets. Beyond the concern about a trade war is the probability of a slower global growth in 2019 due to monetary policy normalisation by the major central banks,” it added.
Given the volatility, it advised investors on the local bourse to adopt a trading strategy for the most of 2H18, coupled with bottom-up stock picking on dips for the long term.
“[The theme] will centre around regulatory risk, which has been substantially priced in for many of the sectors/stocks affected, but their share prices may have further downside tendency as the details are announced, thus offering better buying opportunities then. Another [theme] is sectors/stocks with strong earnings growth potential as funds repositioned out from sectors temporarily impacted by the new government’s GE14 (14th general election) manifesto,” it said.
In terms of sectors, Maybank IB Research is positive on oil and gas, automotive, technology, gaming and aviation, while “selective” on banks and property.
Its top stock picks are Genting Bhd, AMMB Holdings Bhd, Inari Amertron Bhd, Alliance Bank Malaysia Bhd, Yinson Holdings Bhd, Bermaz Auto Bhd, Allianz Malaysia Bhd, Axiata Group Bhd, Malakoff Corp Bhd and AEON Co (M) Bhd.