FOCUS OF THE DAY
Strategy: 2018 Market Outlook
Malaysia: Earnings Growth To Propel Market Higher
We maintain our end-2018 FBM KLCI Index target of 1,900pts based on 17.5x 2018F earnings. This is at a 1x multiple premium to the 5-year historical average of about 16.5x, which we believe is justifiable based on the cyclical upturn in corporate earnings, as reflected in an 8.2% growth in FBM KLCI earnings in 2018F (on the heels of a 3.8% growth in 2017F).
We are positive on the outlook for the local equity market in 2018. We believe the major underperformance of the local equity market vs. its regional and global peers during the final months of 2017, could rightfully be seen in a positive light – that the market was just doing its job by pricing in a higher market risk premium ahead of the 14th general election (GE14) which will have to be held by August 2018.
We believe investors should not overlook a slew of positive factors that should drive the local equity market higher which include a mild and gradual rate hike cycle in developed economies, a strengthening ringgit and a robust Malaysian economy. Our analysis shows that there had been a strong correlation between the FBM KLCI Index and the ringgit's strength against the USD between 1 Jan 2014 and 30 Sep 2017. The correlation between the two has broken down since October 2017 – which we strongly believe is temporary in nature. In other words, assuming the ringgit's strength is to at least sustain, we believe the market will eventually play catch-up.
Backed by a cyclical upturn in corporate earnings, we believe cyclical sectors — financial services, property and consumer discretionary — will start to outperform the broader market. We also like certain large-cap names with strong earnings resilience in the construction and power space. Small- and mid-cap stocks could be in the limelight thanks to the government's mandates to GLC funds to invest in this space. Our top Buys are Tenaga Nasional, Public Bank, RHB Bank, Gamuda, Sunway, Bermaz Auto, Kimlun, Luxchem, Prestariang and Berjaya Food.
STOCKS ON RADAR
Malaysia Steel Works, Rev Asia, Hibiscus Petroleum, Johan Holdings
ECONOMIC HIGHLIGHT
Malaysia : GDP may have peaked in 3Q2017
NEWS HIGHLIGHTS
KLK: To buy Dutch specialty chemicals business, plant
UEM Sunrise : Buys land for RM109.5m
Cocoaland: Lower additional tax, penalty
Private equity fund: Nazir confirms he’s mulling over private equity fund
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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