Malaysia Hide And Seek (UOBKH)
Strategy – Malaysia
Hide And Seek
Persistent market sell-off has created some modest buying opportunities, although we still expect the market to consolidate through 3Q13. Nevertheless, expect improving macro indicators to emerge, particularly in 4Q13, which should allow the ringgit to firm up. While a defensive strategy is appropriate – ie hiding in low beta and high dividend yield stock – we also advocate seeking opportunities for sold down large caps. However, avoid small caps for now.
• Mini capitulation in the making? The market was again sold down yesterday, as many local investors joined foreign investors in the selling spree. The FBMKLCI has fallen 93.85 pts (-5.2%) in the last 10 trading days. The benchmark index is down 6.0% from this year’s peak, and in US dollar terms, it is down 7.6% ytd. Concerns of a potential twin deficit and the US Quantitative Easing tapering have undermined the ringgit and continued to dog the equity market.
• Downside to YE FBMKLCI target… We will review our YE FBMKLCI after this reporting season, as we foresee a period of subdued trend in foreign ownership. Nevertheless, ample domestic trading liquidity should ensure a neutral (mean PE) valuation, which suggests a YE FBMKLCI target of around 1,770.
• … but no crisis in the making... Our preliminary stress tests suggest that Malaysia’s economy and stock market should be relatively resilient to concerns of twin deficits and outflow, based on the country’s ample foreign reserves, and our expectations for improved exports in 2H13, a current account surplus and a more fiscally-prudent 2014 Budget. Compared with the Asian Financial Crisis (AFC) period, the country’s international reserves are ample relative to its foreign debt obligations. While household debt-to-GDP is at a record high, it is buffered by adequate household financial assets and ample liquidity at the central bank. These trends should allay the present concerns and allow the ringgit to regain firmer footing vs the greenback.
• … although corporate growth outlook and valuation are dampened. However, the current conditions have weakened the ringgit, which leads to higher imported inflation, and exerts pressure for fiscal (a tighter 2014 Budget) and monetary (rise in domestic interest rate) discipline. The direct implications are slower growth in domestic consumption, postponement or deferral of mega project implementation, and downgrade in corporate earnings growth expectations.
• ‘Hide and Seek’ Strategy. While current market conditions justify a more defensive strategy, ie hiding in some weak-ringgit beneficiaries and high dividend domestic-oriented companies, we still seek trading opportunities ahead of an expected market recovery in 4Q13. Focus should be on large caps, but generally avoid small-mid caps. We like the defensive Telco and Gaming sectors, and the O&G drilling & production subsector, while the Glove and laggard Plantation sectors
also feature resilient qualities.
• Top BUYs: DiGi, Gamuda (replacing IJM Corp), Magnum (reinstated) and Maybank. Other notable Buy calls are IJM Corp and IOI Corp. While rated HOLD, heavily sold down Sapura Kencana and Top Glove promise some upside. SELL calls include the fundamentally challenged MISC, MMHE, and pricey Air Asia, Hartalega and UMW Holdings.
• ‘Stress test’: Assessing the country’s fiscal health. A quick look at the key financial indicators show that Malaysia should be far more resilient to capital outflows this time around vs the AFC, as tabularized below. We expect the country’s current account (CA) outlook to improve in 2H13 due to a) improved export value following the ringgit’s weakness, b) revelation of a tighter 2014 Budget, and c) improved crude oil production. Moreover, the country’s private investment has recently crossed 15% of GDP (it was hovering at 11.5-13.5% of GDP in recent years), signaling a potential improvement in production output in subsequent quarters that could possibly improve the country’s CA.
Publish date: 28/08/13