Malaysia‟s growth prospects will take the lead from constantly improving global macroeconomic conditions as we see domestic demand taking a slight backseat in the coming two years as the country adjusts to subsidy rollbacks and the resulting heightened costs of living.

But with global economies, particularly that in the West, poised to record their highest levels of growth in recent years in 2014, the prognosis for Malaysia is good. Nonetheless, we see structural reforms within the domestic economic and financial systems to cap liquidity-driven exuberances in the medium-term, leading us to expect a more tepid performance for the local bourse this time round, contrary to consensus expectations.

On that note, we see the FBM KLCI closing 2014 at about 1,920 points, with earnings growth of 7.5% and which also translates to 16x 1-year forward earnings. We don‟t see the FBM KLCI and by extension, the local bourse, setting our hearts on fire but it will certainly be higher come the end of next year.

What then for next year? More of the same, but with a slightly greater emphasis on medium-capitalized stocks, particular those deeply-undervalued situations which could find some favor as investors rotate from liquidity driven (and somewhat “expensive”) stocks to value-driven themes next year. The oil and gas sector will continue to excite given the amounts of contracts still to be awarded by Petronas from its 5-year RM300bn capital expenditure plans (c. 55%) while the plantation sector is already seeing a re-rating from an anticipated improvement in CPO prices next year. Amongst names that we like for the undervalued situations are DRB-Hicom, IGB Corporation and SP Setia. For the oil and gas space, Perdana Petroleum and Daya Materials stand out. In plantations, Ta Ann Holdings and TSH Resources present attractive investment propositions.

While 2012 and 2013 were years of expectation which drove markets higher, 2014 will be marked as a year of implementation in which structural issues around the globe will need to be satisfactorily sorted out, principally in

Malaysia: Save the Money. Subsidy rollbacks, and its toll on inflation and the domestic consumer

China: Watch the Money. Continuing to maintain a balance between fiscal exuberance and monetary responsibility as the country attempts to shift growth to a consumption-based one

Europe: Spend the Money. Its growth, with the recent 0.25% interest rate cut aimed at stimulating it even further rather than a move to stem a deflationary cycle

US: Keep the Money. Stimulus tapering, with only the pace now in question following the answering of the when. Constantly improving economic conditions will be soothing balm however.

Source: PublicInvest Research - 20 Dec 2013