Midway past the Q3 2016 reporting season (two thirds of our stock universe having reported), corporate earnings have thus far been less than inspiring - with 15% and 52% beating and meeting

Midway past the Q3 2016 reporting season (two thirds of our stock universe having reported), corporate earnings have thus far been less than inspiring - with 15% and 52% beating and meeting our projections respectively, while 33% coming in below. This is marginally better when compared with the averages of 14%, 52% and 34% for "above", "within" and "below" over the last eight quarters.

Meanwhile, against the market consensus, thus far, the numbers have been weaker with "above", "within" and "below" at 12%, 36% and 52% respectively. Thus far, the most disappointing sector has been plantation. While purer upstream players have delivered, integrated players have missed largely due to weak performance of the downstream segment as higher feedback costs squeezed margins. Also, all consumer stocks reported so far have disappointed, largely due to weaker-than-expected sales volumes and margin pressure as they no longer enjoyed abnormally low input costs seen in the previous years. We take comfort that index-heavy sectors such as financial services, telecommunications and oil & gas, have thus far reported satisfactory results.

After factoring the earnings changes thus far, our FBM KLCI earnings growth forecasts for 2016F and 2017F have been tweaked to -3.1% and +7.7% from -4.1% and +8.4% respectively. The lower earnings growth rate in 2017F is "technical" as it is a result of a higher base in 2016F.

Our 2016F and 2017F FBM KLCI earnings have been raised by +0.95% and +0.27% respectively largely due to +18% and +14% upward revisions in FY16F and FY17F earnings of Genting Malaysia, to reflect lower effective tax rates driven by capital allowances. Meanwhile, in terms of earnings growth forecasts of "all sectors" - a broader but slightly more volatile earnings gauge encompassing the entire universe of our stock coverage - the numbers for 2016F and 2017F have been tweaked to +2.8% and +10.2% from +2.1% and +9.9% respectively. 

We maintain our end-2017 KLCI target of 1,745 pts which is based on 17.5x 2017 earnings, at a 1x multiple premium to its 5-year historical average of about 16.5x. We believe the premium could be justified by: (1) a cyclical upturn in corporate earnings, as reflected in our projected +7.7% growth in FBM KLCI earnings, which are in turn underpinned by a stronger projected GDP growth of +4.5% in 2017 versus +4.2% in 2016; and (2) the sustained accommodative monetary policy stance adopted by most central banks globally. We maintain our end-2016 KLCI target of 1,680 pts based on 18.3x 2016 earnings.