Equity Strategy

 A decent piece of research overview from KAF.

Following lacklustre trading for most of the year, the FBM KLCI has broken down in the past month. The sell-off was sparked by concerns over weaker global growth and collapsing oil prices. Although the oil price decline is a concern, we think the risk on the current account, in particular, is manageable. We expect GDP to be buoyed by resilient domestic demand, which should get a boost from the large scale infrastructure projects expected to begin next year. We view the correction as an excellent buying opportunity and introduce an end-2015 index target of 2,070, offering 17% potential upside.
 

Why bother?
Issues To Consider 

 ·         Another global sell-off - Although global growth expectations may have been too high a few months ago, we do not think the situation is as bad as during the European sovereign debt crisis in 2011. In fact, it is probably more comparable to the QE tapering jitters seen in July/August 2013. The FBM KLCI fell by as much as 16% during the 2011 sell-off while the correction last summer was under 7%. More importantly, the index recouped its losses in four months following the 2011 sell-off and in about a month last year, trending even higher over time. 

·         A big picture perspective - We believe the US is on a strong footing while China should deliver healthy growth albeit slower than in the past few years. The main external concern is Europe. Locally, private consumption has slowed along with fiscal consolidation, but we believe GDP growth of 5.8% this year and 5.4% next year is achievable. The 2015 Budget, while providing good follow through of last year’s reforms, also shows greater flexibility on the part of the Government now that desired results from reforms are coming through. Along with public-private initiatives, infrastructure projects worth as much as RM75bn should take off in 2015. We believe that investment activity should pick up further next year while the budgetary measures coupled with the significant infrastructure multiplier should shore up sentiment. 

·         Two key risks to key an eye on - We discuss the exuberance in property prices over the past 2-3 years and the present collapse in commodity prices, mainly Brent crude. Interestingly, we find that the country’s large surplus from energy is mainly from LNG exports, as Malaysia became a net importer of petroleum early last year. Property prices have slowed in the past three quarters but there needs to be further easing in order to prevent an unwanted accident. 

·         Good value emerges despite index target being pushed back - Despite earnings disappointments, we believe expectations built into share prices are quite modest. The market’s 1-year forward PER has fallen from 16.6x last December to 14.4x currently while ex-defensives, it is trading at only 12.9x 2015F. Following the latest sell-off amidst rising risk premiums, we are lowering our YE index target to 1,905 from 2,000. Under the assumption that Malaysian risk premia should still ease over time, we introduce an end-2015 index target of 2,070, offering 17% potential upside. 

·         Compelling entry points - Besides compelling opportunities in Banks, Oil & Gas and Technology, we highlight the resilience and growth upside of sectors linked to domestic themes such as Construction and Property. We also cover several companies trading at attractive valuations and offering strong cash generation and healthy yields that are largely insulated from external issues.

Actionable Ideas
·         We maintain a bullish stance on Banks along with Oil & Gas, Construction, Technology and Property.
·          Big-cap stocks we like are: TNB, CIMB, HLFG/HLBK, BAB, RHBC, MISC, and IJM.
·         Key mid-caps are: MSGB, UNI, PETR, MPR, WCT and SWB.
·         Five key stocks to sell are Public Bank, PPB, Petronas Gas, Top Glove and Astro.

Key Catalysts
·         Implementation of key budgetary proposals, we believe, should act as a re-rating catalyst for the market especially if there is good follow through in rolling out the slew of large projects. Also, better earnings delivery, good investment growth, some recovery in commodity prices, and resilient consumption.

Key Risks
·         The main risks are poor earnings delivery, sustained weakness in CPO/Brent prices and sharp slowdown in domestic demand. A key component of earnings delivery is the timely implementation of ETP projects and fiscal policy, in general. Sharp US dollar appreciation is also a potential risk.