Investment Highlights

• Stronger US$ expected in 2Q2022. YTD, the US$ has strengthened by 6% to RM4.41/US$, accelerating recently to US$4.42/US$ following the May US inflation surge of 8.6% YoY which led to a more aggressive interest rate hike of 75bps to a 1.5%-1.75% range by the US Federal Reserve. However, our in-house economist views the 2Q2022 stronger US dollar as temporary and still within expectation of RM4.40/US$-4.50/US$ for 2Q2022 against the backdrop of continued global liquidity tightening, which drove investors to reallocate funds to dollar-denominated assets, together with China’s zero-Covid and fiscal stimulus policies which weakened the yuan.
  The Dow Jones rebounded 1% last night following the statement by US Federal Reserve’s Jerome Powell that such rate hikes are not likely to be common, downplaying the possibility of a 100 bps hike. Our economist maintains the view of a stronger ringgit reaching RM4.32/US$ by 3Q2022 and RM4.20-RM4.25/US$ (vs Bloomberg consensus’ RM4.30/US$) by 4Q2022, premised on Malaysian 2022 GDP growth of 5.6%, prudent currency management and pricing-in of US rate hikes together with speculations of a potential US economic slowdown in 2023 that could mean a dollar pullback. This also assumes 1-2 additional BNM overnight policy rate hikes to 2.25%-2.50% by 4Q2022, potentially lower than our in-house US federal funds rate expectation of 3.00%-3.25%.

• Net foreign equity selling for June 2022 so far. Since the beginning of June until yesterday, foreign investors have switched to net selling with a cumulative RM702mil, which bashed down the FBMKLCI to below the 1,500 threshold to 1,459 currently vs 2021 low of 1,475 in Omicron-dampened December last year. This reduced 2022 YTD foreign net buying positions by 9% to RM6.7bil from RM7.4bil as at 31 May 2022 (Exhibit 4), in which the financial sector accounted for RM3.2bil (41%), industrial products & services RM2.4bil (31%) and plantation RM2.2bil (28%). Notwithstanding the recent foreign equity outlows, we continue to expect a return of foreign equity buyers in 2H2022 given our inhouse and consensus expectations of a stronger 2H2022 ringgit.

• Losers and winners from stronger US$... Based on our sensitivity analysis (Exhibit 1) on the strengthening US dollar by to RM4.40, RM4.60 and RM4.80, most of the sectors have negligible to mild impact. Only the automobile segment’s FY23F earnings could be substantively eroded by 6%-18% from higher US$-denominated component costs while a clear beneficiary will be Hibiscus Petroleum as its upstream oil & gas revenues could translate to a significant earnings accretion of 5%-15%.
  Mild positive beneficiaries will be technology (3%-8%). Even though glove companies are exporters which could experience a 29%-87% surge in FY23F earnings from higher US$ revenues net of raw material costs, this could easily be more than offset by an industry-wide cyclical decline in average selling prices. Power RootThe other segments’ core earnings which could be mildly negatively impacted are ports (1%-3%), electronics manufacturing services (1%-4%) and telecommunications (2%-3%).

• … larger concern on weakening domestic demand as we acknowledge that consumer sentiments could be dampened by higher import-driven inflation. However, based on our analysis of the FBMKLCI constituent stocks, we note that 6.5% of the index could be impacted comprising Nestle, Mr D.I.Y.’s retailing operations and Sime Darby’s automobile operations. Assuming a 10% earnings contraction for these 3 stocks translates to a 1.2%-point decline from our 2023 EPS growth of 8.3% to 7.1%.

• Maintain base-case end-2022 FBMKLCI target at 1,745, pegged to its 5-year median as both foreign and local investors are likely to switch back into buying positions towards the end of the year amid clearer visibility to 2023F EPS growth expectations of 8.3%. Near term, the fund flow volatility could widen the index range-band to 1,400 and 1,600 (vs our earlier 1,500-1,600) as the recent reopening of international borders and stronger economy may be mitigated by stagflationary worries, earnings volatility amid commodity price swings, further supply chain shocks from Russia being shunned by the global economy, GST reintroduction and political noises running up to the 15th general election (GE15).

• Our worst-case outlook remains on an FBMKLCI drop to 1,415, pegged to 2022 PE of 14.8x, 1 SD below its 5-year median, driven by substantive earnings disappointments, fresh outbreaks of new Covid-19 variants, further geopolitical shocks and a reversal of foreign net flows. We maintain a blue-sky FBMKLCI index scenario at 1,820 pegged to 0.5x SD above its 5-year median based on a stronger 2022 GDP growth at 6%.

• Maintain OVERWEIGHT on the automobile, banking, media, oil & gas, ports, power and technology sectors with top BUYs being Maybank, Tenaga Nasional, CIMB Group, RHB Bank, MR D.I.Y., Telekom Malaysia, Inari Amertron, Malaysia Pacific Industries, UMW Holdings and Dialog Group. For dividend stocks, our top 5 picks with yields of over 6% are Malakoff, Astro, Globetronics, Lagenda Properties and YTL REIT.

Source: AmInvest Research - 16 Jun 2022