KUALA LUMPUR (Dec 16): CGS-CIMB Research expects 2022 to be a "more challenging" year as the research outfit sees potential headwinds weighing down the market.

“We expect investors to tread cautiously into 2022 as we see potential headwinds buffeting the market in the form of new Covid-19 waves (the Omicron variant), the return of intraday short selling, foreign fund outflows due to the Fed's (the US Federal Reserve) taper, reversals of fiscal stimulus, tighter monetary policy, higher transaction cost of trading of Malaysian shares, corporate earnings risks due to higher taxes and political risks,” said CGS-CIMB Research in a note on Wednesday (Dec 15).

It added that the probability of the 15th general election being held in 2022 remains high as the Covid-19 pandemic is under control and 78% of the population had been fully vaccinated as at Dec 14, 2021. 

“These factors are likely to dent market sentiment,” it noted. 

Notwithstanding that, CGS-CIMB Research said the downside could be capped by expectations of stronger economic growth as Malaysia reopens international borders following the lifting of the interstate travel ban since Oct 11, 2021, with additional liquidity available for domestic institutional funds like the Employees Provident Funds following the end of various one-off withdrawal schemes under stimulus packages announced in 2020 and 2021, and given that the KLCI is trading at undemanding valuations based on forward price-earnings of 14.3 times — close to 1.5 standard deviation below the three-year mean.

The research house offered five policy events to watch that could shape 2022 and six trading themes. However, it advised investors to be “nimble” in their investment strategy as the market is likely to stay volatile.

These five events are the decision on the single wholesale network model for 5G roll-outs in Malaysia, resumption of foreign worker intake, resolution of allegations of forced labour issues in Malaysia, the decision on the Mass Rapid Transit Line 3 project and the allocation of five digital banking licences.

The six investment trading themes for 2022 are beneficiaries of overnight policy rate hikes, value and laggard plays, recovery plays, electric vehicle plays, environmental, social and governance picks, as well as high dividend-yielding stocks.

While it maintained its KLCI target of 1,495 for end-2021, the research outfit lowered its end-2022 KLCI target to 1,612 points from 1,637 points previously.

The downward revision of its end-2022 KLCI target was to reflect changes in the KLCI constituents and the research house’s recent downgrade of its earnings estimates for Top Glove Corp Bhd.

“Post revision, we now project KLCI earnings to rise 39% in 2021 before declining by 4.8% in calendar year 2022,” it stated.

“Key risks to our earnings projections are slower global growth, inability to pass on rising costs, higher taxes, a shortage of foreign workers, rising trade risks and political uncertainties,” it said.

Potential upside risks to earnings are better-than-expected commodity prices and the government's reconsideration of some of the new tax measures to reduce tax burdens, it added.

CGC-CIMB Research’s preferred sectors are banks, technology, gaming, petrochemicals, media, oil and gas, healthcare, brewers, utilities, packaging, healthcare and electronic manufacturing services.

Its top three stock picks are Inari Amertron Bhd, Hong Leong Bank Bhd and QL Resources Bhd.