Foreign net sell continues

Foreign investors sold a net MYR1.3b of Malaysian equities in Dec 2015, bringing the total net sell to MYR19.7b for 2015 (highest since the data was available from early-2010). This was 2.9x the MYR6.9b net sell in 2014. Consequently, the cumulative foreign net buy since early-2010 has tapered to just MYR7.2b at end-2015 versus MYR26.9b end-2014. Foreign shareholding in the market was down 1.2-ppt YoY to 22.6% as at end- 2015, from 23.8% end-2014. The net sell has continued into the new year. Pressure points

Our views for 2016, highlighted in our “2016 Outlook & Lookouts” report on 14 Dec 2015 are unchanged. We expect volatilty to persist; largely externally induced, compared with 2015, with headwinds revolving around US’ monetary policy normalisation, China’s structural slowdown, and the impact to EMs. An ‘externally induced’ wild card for Malaysia is crude oil price which has fallen further to USD32/bbl (Brent). The fluid crude oil price situation could rekindle concerns on fiscal and current account balances.

Target and growth

Our end-2016 KLCI target is 1,800, which continues to tag the KLCI to, at about its mean PER valuation (our 1,800 implies 15.6x 2017 PER). This, in turn, is premised on our 7.5% KLCI core earnings growth forecast in 2016, 7.7% in 2017. Bottom-up, based on the target prices for the KLCI stocks under our coverage, we derive 1,790. 2016 corporate earnings would receive a boost from a lower statutory corporate tax rate by 1-ppt. The earnings risk however remains on the downside; pressure points are at the banks, consumer-related and plantation sectors.

Strategy

We continue to advocate a defensive core equity portfolio – telco, utility, consumer staples, selected REITs, healthcare - with the thematic and value stocks to provide the outperformance. Key thematics, in our view, will revolve around: (i) substantial construction awards relating to rails, highways, TODs, (ii) continued strength in the USD, (iii) Sarawak’s state election in 2Q16, (iv) a strong El Nino in 1H16, and a potential La Nina towards end-2016, (v) Shariah investing. Longer term, investors should strengthen their portfolio: (i) in the niche export sectors, which are TPPA beneficiaries, (ii) which will benefit from China’s One Belt, One Road.

Source: Maybank Research - 8 Jan 2016