KUALA LUMPUR (Jan 19): Valuation of Malaysian equities is far from being stretched despite its gains, but recovery in domestic consumption, oil prices and external demand could be the key tailwinds, according to AllianceDBS Research.

The benchmark index — which has chalked up a 4.6% gain since window dressing activities in December — has continued its uptrend to gain another 1.6% in the first half of January, amid a global equity rally.

The index last closed at 1,821.60 points.

In a strategy note today, AllianceDBS said although trading at CY18 PE of 16.1 times, which is slightly ahead of the historical mean, Malaysian equities’ valuation is far from being stretched amid a global rally.

AllianceDBS targets the FBM KLCI to end at 1,870 this year, supported by sustained growth in electronic and electric (E&E) exports, loan growth uptick and interest rate hike, global oil and gas capital expenditure (capex), as well as improved private consumption.

Exports of E&E goods — which constituted 38% of Malaysia’s exports — are expected to sustain its growth this year amid synchronised global growth, albeit at a slower pace due to a high-base effect in 2017.

“We prefer the electronic manufacturing services (EMS) sector to the technology sector as a proxy for E&E export growth, due to the former’s lower valuation and higher earnings growth potential,” AllianceDBS said.

Loan growth uptick and interest rate hike post-14th general election is expected to anchor a 10.1% earnings growth for the banking sector. 

And as loan growth typically lags the underlying economic growth by two to three quarters, better traction is expected in the second half of 2018 (2H18).

Bank Negara Malaysia’s more hawkish stance will also benefit banks in general, when it hikes its policy rates, which is expected after the general election.

“Brent crude oil prices continue to gain further ground in 2018 and this is a major boost not only to government’s finances, but can also act as re-rating catalyst for the ringgit, and oil and gas stocks,” the research house said. 

With improved sentiment within the global oil and gas value chain, the industry's capex spending is poised to recover at a gradual pace going into 2018.

On the domestic front, private consumption has shown steady improvement since bottoming in third quarter of 2015 (3Q15), as the drag from goods and services tax (GST) eases.

“With general elections due this year, the government will likely keep a lid on the rising cost of living,” AllianceDBS said.

This also translates into a recovery in the domestic discretionary spending in the tourism industry, besides being boosted by further influx of Chinese tourists.

Top picks are Malayan Banking Bhd (target price [TP]: RM10.70), CIMB Group Bhd (TP: RM7.60), Hibiscus Petroleum Bhd (TP: RM1.48), Bumi Armada Bhd (TP: 95 sen), Wah Seong Corp Bhd (TP: RM1.90), SKP Resources Bhd (TP: RM2.50), AirAsia Bhd (TP: RM3.80), and Yong Tai Bhd (TP: RM2.10).