• We remain cautious in our outlook for the Malaysian equity market in the coming quarters. Visibility on growth prospects for 2023 is clouded by macroeconomic worries and monetary policy messaging from a US Federal Reserve that seems determined to extend its hawkish monetary policy pivot, on top of geopolitics and COVID-19 restrictions in China. The imminent general election may be a near-term source of volatility. Investors should hold on to a yield-centric defensive posture, prioritising capital preservation and remaining alert for medium-term opportunities.

• Few re-rating catalysts. The US rate hiking cycle is expected to continue through 1H23, with the Federal Funds Rate (FFR) expected to peak at 4.50- 4.75%. However, with real rates deeply in negative territory, a tight US labour market and rising wages (offset by easing commodity prices), we are unable to rule out the possibility of the terminal FFR rising further should inflationary pressure prove to be stickier than anticipated. Such a scenario would come at the expense of risk assets, with odds lengthening on the probability for a soft landing. A key event to monitor is the 20th National Congress of the China Communist Party, which will kick off on 16 Oct. The party is expected to endorse a third term for President Xi Jinping and offer clues on the zero-COVID policy.

• Risks to earnings and valuations. The slowing growth environment in 2023 will have negative implications for the performance of the domestic economy, corporate earnings, investor sentiment and risk appetite. The stronger USD and higher local interest rates have winners and losers. Forward valuations may not be as low as current forecasts suggest. The 15th general election (GE15) will be a source of near-term volatility, but should ultimately be a market-neutral event – as long as the rule of law and good governance principles are adhered to.

• Strategy. RHB Economics is anticipating a US economic recovery in the summer of 2023, preceded by a slowdown in global growth with risks of a recession. Meanwhile, we remain in a rising rate environment with no certainty on where the FFR will peak. We expect markets to remain volatile. The priority for investors is to focus on getting to the other side and ensuring sufficient liquidity, to take advantage of market weakness with medium-term investment objectives. Key stock selection criterion should include companies with robust balance sheets, pricing power, captive customer bases, recurring demand, the ability to pass through higher costs, and a strong ESG profile. We advocate a core defensive stance with emphasis on resilient high dividend yielding stocks, while remaining alert to identify attractive entry points to nibble on weakness. We maintain our OVERWEIGHT stance on banks, non-bank financial institutions (NBFIs), oil & gas, healthcare, basic materials and gaming. We are UNDERWEIGHT on rubber products. We trim our end-2022 FBM KLCI target to 1,510pts (from 1,580pts), after ascribing a lower 14.5x (from 15x) P/E to FY23 EPS to reflect the less favourable operating environment ahead.

Source: RHB Research - 17 Oct 2022