Kenanga Research has projected the FBM KLCI Target rate for the year-end to be 1,610 from 1670 points projected earlier against a backdrop of a considerably more aggressive monetary tightening by major policy-makers globally in recent months
It said that with inflation seemingly spinning out of control, policy-makers have no choice but to make reining in inflation their top priority by raising rates and embarking on quantitative tightening, inevitably at the expense of growth (or even driving the global economy into a recession) and asset prices.
“While EM assets generally do not do well during a rate hike cycle in the US, we see an exception this time around as the current US rate hike cycle coincides with a super boom in commodity prices, which augurs well for the general commodity export-dependent EM. Also, EM now appears a safer bet vs. Europe given the Russia-Ukraine war situation, “the stockbroking house said.
“Within the EM space, there has been a shift in focus away from China (on the heels of regulatory crackdowns, a tech selloff, an ineffective zero Covid-19 policy, and an ambiguous stance in the Russia-Ukraine war) while Russia has been completely removed from MSCI EM Index in the wake of the war These have resulted in a corresponding rise in weighting for other countries in the index, including Malaysia,” the stockbroking house said
Under the current sustained high inflation scenario, Kenanga said that it believes that investors should seek refuge in stocks of companies with strong pricing power. We acknowledge that these are rare in our market, but we believe there are no lack of “near-proxies” for pricing power, which we define as “companies that are able to maintain their margins despite the rising cost pressures”
On the various sectors, the stockbroking firm says that Service-based industries have kept wage pressures at bay, i.e. Banks and Telecommunications players; Suppliers to multinational companies with pricing power, predominantly in the tech/consumer electronics space (which means there are less cost pressures to be passed on along the supply chain), i.e. local players in the fields of Outsourced Semiconductor Assembly and Test (OSAT), Automated Test Equipment (ATE) and Electronics Manufacturing Services (EMS); and Providers of goods/services with a low “price elasticity of demand” such as Private Healthcare.
Kenanga also expects commodity producers with strong names in plantation and oil & gas space as it expects CPO and crude oil prices to stay elevated in 2H 2022.
The stockbroking firm holds the view that the e time is about right for investors to position themselves ahead of the 15th General Election (GE15) due at the latest by September 2023.
“If not dissolved earlier, the parliament will head towards an automatic dissolution in July 2023, paving the way for the GE15 within the next 60 days. With the nation seemingly having already come out the other end of the Covid-19 pandemic, we foresee a shift in the focus of the government’s fiscal spending plan from pandemic relief and vaccination back to infrastructure development,” Kenanga said.