Strategy : Malaysia: ‘Noise’ vs. ‘Substance’ to influence investors

FOCUS OF THE DAY

Strategy : Malaysia: ‘Noise’ vs. ‘Substance’ to influence investors

The BREXIT vote turned out to be a major surprise for investors. The decision flared up uncertainty which we expect will remain high for some time. We do not have the answer on what will happen next, apart from merely postulating. The reason being, there are numerous aspects of the upcoming exit negotiations and we are unable to work on an 'ideal' scenario. We believe investors will eventually have to focus on ‘substance’ and not on ‘noise’. By doing so, we believe Asia ex-Japan markets have opportunities since (1) equity valuation is still attractive reflected by the MSCI Asia ex-Japan price/book ratio which although is still below the long-term trend; (2) macro growth in this region is still better than many advanced economies; (3) country risk assessment shows the countries under our coverage exhibits ‘low-moderate’; (4) most Asian market government bond yields exceeds most of the major global government bond yields; and (5) regional Asian markets have’ low-medium’ correlation and in some cases negative, implying that ‘stock-to-stock correlation’ on a broad perspective is also ‘low-medium’.

Looking at KLCI, our end-2016 KLCI target is pegged at 1,680 based on 16.8x P/E. We expect the market to be sideways driven by the ongoing uncertainties. We think the downside is fairly limited given the low foreign shareholding exposure. Underpinned by our conservative outlook added with moderate GDP growth of 4.0% for 2016, we prefer to focus on sectors that can offer good value and/or visible medium term growth. Hence, construction (Gamuda, IJM, Econpile and Kimlun), power (TNB), malt liquor (Heineken Malaysia)and timber (Jaya Tiasa, Ta Ann) are the sectors of our preference. Besides, we think investors’ appetite will still be on fixed income supported by (1) post-BREXIT worries will see investors seeking opportunities in this region and we expect Malaysia to be in the radar screen; (2) expectation of the monetary policy easing in the advanced countries will entice investors to look at Asian ex-Japan whose yields on average is about 3%; and (3) overall GDP growth in Asian ex-Japan is still higher than advanced countries. On that note we expect our 10-year MGS yield to average around 3.71% for 2016 (4.06% in 2015).

Others :

Maxis : RM10bil sukuk programme for refinancing and capex      HOLD

QUICK TAKES

MSM Malaysia : Hike in gas tariff again   HOLD

Rubber Gloves : 6% higher natural gas tariff beginning 15 July 2016           NNEUTRAL

ECONOMIC HIGHLIGHTS

US : Expect weaker spending going forward

NEWS HIGHLIGHTS

Malaysia Airports Holdings : Shares affected by Istanbul incident

Gamuda : Q3 earnings down slightly on soft property market

Property Sector : S P Setia still positive on Battersea despite Brexit

IJM Corp : IJM feels impact due to forex translation

DISCLAIMER:

The information and opinions in this report were prepared by AmInvestment Bank Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmInvestment Bank Bhd. Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmBank Group Bhd and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.

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