RHB analysts believe there are more grounds for less pessimism as they believe investors should be looking actively at opportunities to build equity positions on weakness.
Opportunities should abound, given the volatile market trends in the coming quarters. Investors are already pricing in expectations that the pace of monetary policy tightening is close to peaking, even as we expect the US economy to avoid a recession. China is pivoting towards an exit from zeroCOVID, while domestic political risks have abated.
Buy large-cap value stocks on weakness, with selective opportunities in the small- and mid-cap spaces.
Near-peak Federal Funds Rate (FFR) and China’s re-opening are rerating catalysts. RHB’s house forecast is for the US FFR to peak at 5.00- 5.25% in 2023, with no rate cuts in 2023. The US is expected to avoid a recession in 2023, with 1H seeing a modest deceleration followed by a recovery in 2H23. By 1Q23 we expect to be close to peak FFR, even as the prospects of a more modest rate of global growth are already well in the price. We expect that the relaxation of China’s zero-COVID policy will be imperative, given the high economic and social costs. While the exit ramp will not be a smooth one – given the anticipated surge in positive infections – it will be an inevitable part of the normalisation process that bodes well for
global growth in 2H23.
The transition to the Pakatan Harapan (PH)- led unity government has served to ease political risk, although the regulatory risk has ticked higher pending clarity on the unity government’s key policy and reform priorities. Markets will be looking closely at the implications for banks, construction, telecommunications, energy, and gaming sectors, and also for the ability of the unity government to work cohesively together. Further out, the new government’s hoped-for centrist approach will be important for the political dialogue to move back to issues and policies.
On strategy, RHB points to equity markets, which the analysts say will retain a propensity for volatility in 1H23. The market catalysts being observed will be offset by a bumpy China re-opening process, domestic regulatory worries, investor reactions to weaker macroeconomic and corporate data points, and persistent foreign fund outflows. RHB believes that, on balance, there are now reasons to be less pessimistic. Forward valuations are not especially demanding, with the FBM KLCI now at 13.2x FY24F P/E. Investors should still approach 2023 with caution but have the predisposition to build positions for the medium term and buy on weaknesses. While another spike in the markets should invite some short-term profit-taking, investors should re-focus on fundamentals with a preference for large-cap value stocks.
The investment bank has an OVERWEIGHT call on banks, O&G, gaming, basic materials, NBFIs, healthcare, and property. It also projects end-2023 FBM KLCI target of 1,660 pts after ascribing a 15x (-0.5SD to mean) P/E to FY24F EPS.
