The research house has released it market strategy analysis report. The most important takeaway from the report could be summarised as such: With strong headwinds, investment strategy will centre on trading angles – a core defensive posture with opportunities in the small-mid cap space.
Speed bumps on the path to recovery. The economic recovery continues apace, culminating in the relaxation of border restrictions on 1 Apr. We remain in the nascent stage of a new growth cycle, but geopolitical risks are clouding the outlook, adding to global inflationary pressures. A more aggressive-than-expected US Fed and the escalation of the Ukraine conflict are key risks, on top of fragile domestic public finances, policy and regulatory worries, and an evolving political backdrop. The investment strategy will centre on trading angles – a core defensive posture with opportunities in the small-mid cap space.
Living with COVID-19. Despite the spike in new COVID-19 cases, the percentage of patients requiring hospital intervention remains low and, accordingly, the healthcare system has been able to comfortably manage the load, on the back of high vaccination rates achieved. The base effect, absence of new movement restrictions, high levels of pent-up demand, steady pick-up in global growth and near-term political status quo will help to support the 5.5% YoY GDP growth projection this year.
Risks aplenty. The Russia-Ukraine crisis has helped to trigger the unexpected return of foreign portfolio funds into the region for its safe-havenappeal, but adds to the lengthening list of risk factors that could threaten global growth. A protracted crisis looks likely, although the core assumption is for the conflict to remain contained within Ukrainian borders. Nonetheless, the resulting spike in commodity prices will exacerbate inflation and the risks to growth compounded, after the recent Federal Open Market Committee meeting revealed a more hawkish US Fed than RHB economists were expecting. Investors are now watching for signals on how the US Fed intends to deleverage its balance sheet. A decision by China to strategically align itself with Russia would further destabilise the geopolitical balance. The research house’s opinion, a lack of political will to achieve fiscal consolidation will keep domestic regulatory and policy risks elevated. The spectre of higher taxes refuses to go away, given the propensity for more populist measures in the run-up to the 15th general election (GE15).
Strategy. The research house expects the economic recovery to ensue, but acknowledge gathering headwinds. Market valuations are not compelling, given the paucity of earnings growth in 2022. Accordingly, the potential for volatility suggests that domestic investors will not look too far ahead, while maintaining a nimble stance. 2022 will be a traders’ market that will require astute bottom-up stock-picking. Investors should remain focused on value and cyclical names that can leverage on the recovery, and look for more attractive entry points to build positions for the longer term, while maintaining core holdings in defensive, high-yield stocks and companies with a strong ESG profile. Hence, the house is OVERWEIGHT rating on banks, non-bank financial institutions (NBFI), oil & gas, utilities, healthcare, basic materials, gaming and technology. Their end-2022 FBM KLCI target is lifted to 1,670pts (from 1,630pts) after ascribing a 16x (unchanged) P/E to FY23 EPS.
