Malaysia’s market implications of policy clarity and continuity seems to be notably absent since 2018.
CGSCIMB, in its Strategy Note today (Oct 5), said they have made three upgrades and one downgrade to their sector recommendations, and four changes to their stocks top picks list..
Inexpensive with decent adjusted growth
With one of two key market catalysts taking shape, CGSCIMB remains constructive on equities.
However, also taking into account changes to their estimates (especially for the KLCI), CGSCIMB reduced their YE KLCI targets from 1,610 to 1,550 for 2023 and from 1,800 to 1,755 for 2024.
CGSCIMB sees a greater upside for the broader FBM100 index and maintain that a reversal in the strong US dollar trend is necessary for a sustained breakout from the relatively depressed present price levels.
The FBM100 Index trades at 13.1x one-year forward P/E, more than one standard deviation below mean. If CGSCIMB adjusts for distortions caused by falling average selling prices for gloves, plantations and petrochemicals, overall earnings growth is not bad at 16% for 2023 and 11% for 2024.
It was up 21% yoy in 1H23. Policy clarity and continuity Retaining status quo at the six state elections provides real hope for policy clarity and continuity over the next few years, a key catalyst we have been waiting for.
The Ekonomi Madani announced in July provided high-level insights into Prime Minister Datuk Seri Anwar Ibrahim’s administration’s policy framework, with further granularity coming from the NETR, NIMP 2030 and mid-term review of 12MP.
There now needs to be proactive implementation in areas such as fiscal consolidation and broadening of growth drivers, which could have positive implications on the equity market.
A fairly detailed simulation through to 2025 shows that it is not too difficult to reach a fiscal deficit of 3.5% of GDP (from a target of 5% in 2023) while NIMP 2030 covers initiatives that could lift the pace of economic expansion.
Dollar defying all obstacles
The other catalyst was for a breakdown in the DXY, reversing the depreciation trend seen across the Emerging Market (EM) currency complex since 2010. Unfortunately, this has not yet happened (underpinned by a hawkish Fed), with the DXY recovering to 106 from below 100 in Jul 23.
A turn in the US dollar, CGSCIMB believes, is important as it affects flows into EM risk assets, including Malaysia.
A clear example of this is the brief period in Jul 23 when the DXY broke below 100 and foreign inflows into Bursa were RM1.4bn for the month, reversing 10 consecutive months of outflows.
Among ten EM currency cross rates CGSCIMB looked at, most have had a high inverse correlation to the DXY since 2010, depreciating by an average 64% (the ringgit is down 37%).
Nevertheless, CGSCIMB finds it unsustainable that interest rate differentials alone can have such a profound impact on an exchange rate and believe it is a matter of time before markets focus on the mounting US government debt, ballooning debt costs/fiscal deficit, and sizeable US money creation in the past 13 years.
Changes to key recommendations but remain domestic focused
Potential improvements in policy initiatives should provide further support to the local economy.
Hence, CGSCIMB remains heavily weighted on domestic-driven sectors and companies and have upgraded consumer discretionary, telecoms and utilities from Neutral to Overweight and downgrade REITs to Neutral.
CGSCIMB stays positive on, among others, real estate, construction, conglomerates and banks but Underweight on plantations, industrial goods (gloves) and technology.
The research house has made 4 changes to their list of 20 top picks and updated the list of 10 underperformers. The revised list of 20 trades at 11.8x 2024F P/E and offers 4.5% net yield and 14% 2-year normalised profit CAGR.
However, there is limited valuation support for the list of 10 as seen by its 21.8x CY24F P/E and 2.8% yield amidst a declining earnings trend. Among the changes include:
