OPR cut negative for KLCI due to index heavyweight banking sector, says HLIB

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KUALA LUMPUR (May 6): Hong Leong Investment Bank research (HLIB) said the 50 basis points overnight policy rate (OPR) cut is negative for the KLCI by virtue of the index heavyweight banking sector (NIM compression concerns).

In a strategy note today, the research house said that interestingly,  the KL Finance Index closed higher yesterday (+1%).

“Rewinding back, in the past 3 OPR cuts (all 25 bps each), the KLCI fell by (i ) -2.5% in a span of 1-week since May 7, 2019, (ii ) -3.6% over 12-days since Jan 22, 2020 and (iii) -17.5% in 12-days since March 3, 2020; although the latter 2 observations were also amplified by Covid-19.

“While negative for banks, our banking analyst notes that earnings impact should be less severe this time around as FD repricing is also quicker, given circa 80% is expiring by June 2020,” it said.

HLIB said although a dovish setting has done well for REITs in the past, it could be partially muted this time around as retail based REITs are bearing the brunt of the movement control order (MCO).

“Axis would be our preferred pick in the REIT space as it is relatively more insulated from the MCO given its industrial tilt,” it said.

HLIB maintained its KLCI target of 1,350 (14.6x global financial crises mean PE pegged to mid-2021 EPS).

“Having rebounded 13.9% from its low of 1,220 (March 19), some degree of profit taking could perhaps emerge as we enter the May reporting season.

“Key risks to watch out for include (i ) a 2nd wave with lockdowns around the world eased/ lifted and (ii) possible resurgence of US -China t rade war, noting the less than cordial statements by President Trump on China,” it said.

Meanwhile, HLIB said the KLCI’s dividend yield now stands at 4.53%, representing a spread of 2.53% to OPR and 1.68% to 10-year Malaysian Gobernment Securities.

It said these spread readings are rather unprecedented at >+3SD above 10-year mean, suggesting some upside potential for divvy plays.

“In addition, the defensive appeal of high divvy yielders should also stand out in light of the uncertainties from Covid-19.

“Some of the Buy rated divvy yielders that we like are Astro Malaysia Holdings Bhd (yield: 9.1%), British American Tobacco (M) Bhd (8.3%), Pecca Group Bhd (7.6%), MQREIT (7.6%), Taliworks Corp Bhd (7.4%), MBM Resources Bhd (7.0%), Pharmaniaga (6.7%), Hap Seng Industries Bhd (6.3%), Matrix Concepts Holdings Bhd (6.2%) and UEM Edgenta Bhd (5.1%),” it said.

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