Domestic Investors More Constructive On Malaysian Equities, With Lots More Upside Left, Says CGSCIMB

While domestic investors are becoming more constructive, stock broking house CGSCIMB got the sense that overseas funds are starting to notice the positive changes taking place in Malaysia.

While encouraged by the markets’ good start in Jan 24, there is a lot more upside left, CGSCIMB said in its Strategy Note today (Feb2), adding there is no change to their 1,755 year-end KLCI target.

Outlook marketing in Hong Kong and KL

CGSCIMB had marketed their 2024 outlook to domestic and HK investors over the past few weeks. During the investor meetings, CGSCIMB noticed that domestic investors are becoming more constructive on Malaysian equities, with some even highlighting their 1,755 year-end KLCI target as not farfetched.

“Of course, the encouraging start to the year, with the KLCI and FBM100 up 4% each in Jan 24 and several sector indices outperforming these returns, has clearly helped sentiments.

Overseas investors, on the other hand, have largely been out of the Malaysian market for most of the past 5-6 years (essentially since GE14 in May 2018) and have not been following recent developments that closely, CGSCIMB  said.

Many seemed to agree that the macro-outlook and policy story in Malaysia were becoming a lot more interesting, while the poor performance in HK/China means that some of the ASEAN markets could stand out in comparison.

Reasonable expectations (as seen by forward earnings and cashflow multiples) built into the market make portfolio allocations easier, in their view, with sufficient stock ideas for the compelling themes on offer.

Key topics of discussion

From a macro sense, areas of discussion included the sustainability of private consumption, latest trends in tourism, implementation record of the government and pace of subsidy rationalisation in Malaysia.

CGSCIMB believes that the implementation of significant development spending budgets, in particular, needs to be expedited as these catalytic projects are critical to not only provide economic stimulus but more importantly pave the way for private sector participation in key industrial development initiatives and the ambitious NETR.

At the sector level, there was good reception to their continued bullishness in Real Estate and acknowledgement that the performance of Construction stocks (i.e. companies like Gamuda, which have delivered in the past few quarters) should have been better.

CGSCIMB noticed strong interest in Oil Services, Energy Transition (particularly TNB) and the Banking sector among some of the foreign investors.

There was also decent interest in the theme of potential value-unlocking exercises, with discussions mainly surrounding Axiata. Foreign investors, in particular, seemed surprised as to the reasonable valuations that Malaysian stocks are trading at currently, in addition to the healthy yields and, in some cases, good growth on offer.

Stay the course; several laggards also look interesting

CGSCIMB is encouraged by the uptick in market activity in the first month of 2024. However, they would stress that there is still plenty of upside left as investor focus broadens out from just strong momentum ideas and concept plays (such as the potential revival in Singapore-Johor activity).

The three headwinds that brought the market steadily down from 1,895 in May 2018 to a low of 1,380 in Jun 2023, i.e. policy, currency and earnings disappointments, CGSCIMB maintains this could form a potent combination of powerful tailwinds going forward as policies improve, the strong US dollar trade reverses, and earnings delivery improves.

CGSCIMB sector and stock recommendations remain focused on a strong domestic economy; they are still relatively cautious on most externally driven names.

CGSCIMB recommends accumulating strong outperformers (in areas such as Real Estate and Construction) on any profit-taking ahead of Chinese New Year, while also raising focus on laggards delivering and/or expected to deliver better results in sectors such as Consumer Discretionary, Telecoms, Banks and Oil Services.

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