The negative newsflow continues for the local benchmark FBM KLCI, but a positive inflection may be at hand to support the index’s return to 12-month highs of 1,850, about 13% up from current levels. Read on for an excerpt of Macquarie Equities Research’s (MQ Research) report (26 Apr), and have a look at its top stock picks.

Event

• Sapped by extended macro and political uncertainties, both the Ringgit and KLCI have been sharply underperforming year to date (YTD), the latter declining 2.4% even as Asian peers rallied. However, latest spate of foreign selling, prompted by FTSE Russell putting Malaysia on its fixed income watch list, may mark the bottom. Fiscal stimulus, per resurrection of East Coast Rail Line (ECRL) and Bandar Malaysia projects, is returning, oil prices are exceeding target and liquidity is ample. Government policy-centric catalytic newsflow alone could allow the KLCI to recover to 12-month highs of c.1,850 (+13%).

Impact

• Negative newsflow continues…: FTSE Russell excluding Malaysian Government Securities (MGS) from the World Government Bond Index (WGBI) would exacerbate ongoing foreign sell down, especially if other index providers follow suit – MQ Research estimates c.USD23bn at risk, almost a quarter of outstanding MGS. Domestic liquidity has been supporting yields but this will not prevent sustained Ringgit weakness, and is diverting funding for other asset classes i.e. loans, equities.
• … but positive inflection at hand? Fiscal consolidation has been the new government’s priority since GE14 (May 18) but with oil prices above target (oil-related revenue is 25-30% of fiscal total) and budget optimisation advanced, stimulus is returning per resurrection of the ECRL (RM44bn) and Bandar Malaysia (RM180bn GDV) projects, with MRT 3 and the Kuala Lumpur-Singapore High Speed Rail (HSR) potentially to follow. Long-awaited policy clarity re key government linked companies (GLC) is also imminent, while financial system vulnerability to foreign capital outflow is low.
• KLCI 1,850 – a matter of policy: while clarity re major infrastructure projects is a start, there are plenty of similar policy resolutions still pending, especially for GLCs (including Petronas entities), which are 32% of KLCI capitalisation. Definitive policy clarity re Tenaga, Telekom/telcos and Malaysia Airport Holdings (MAHB), coupled with execution on Petronas Monetisation, widening stimulus and political certainty re pending Prime Ministerial transition, would support a base case KLCI target of 1,800, with blue sky scenarios taking this to 1,900.

Outlook

• Per the table below, deep-value non-bank GLCs are Tenaga, Telekom and Axiata, while for Petronas subsidiaries, MQ Research likes PChem and MISC. MQ Research’s preference for the corporate banks (Maybank, CIMB, AMMB, RHB) is working well, with recommended switch out of Public Bank reiterated in its April downgrade report. Re construction sector, MQ Research prefers smaller niche players such as AQRS, MRCB as well as consultant HSS, while weaker Ringgit bias will continue to benefit exporters – MQ Research likes Vitrox and TopGlove. PGas (switch into Tenaga), Public Bank, BAT, Setia and Genting (M) are non-consensus Underperform ratings.

Source: Macquarie Research - 29 Apr 2019