• Glove stocks out, AMMB and QL Resources in. The forthcoming semiannual review of the FBM KLCI component stocks will be announced on 7 Dec, and based on market capitalisation rankings at the close of business on 21 Nov. The new changes will take effect after 16 Dec. In the event that 21 Nov is declared a public holiday following the 15th general election on 19 Nov, the cut-off date will be 18 Nov. We expect AMMB and QL Resources to replace Top Glove and Hartalega, although the expected volatility nearing the elections means that the situation will be fluid.

• Hap Seng Consolidated (Hap Seng) does not meet the liquidity hurdle. According to the ground rules of the FTSE Bursa Malaysia Index Series, a security would be deleted if its market cap ranking among eligible securities drops to 36th or lower. A security would be inserted into the FBM KLCI at the periodic review if its ranking by full market value rises to 25th or higher. Based on the latest market cap rankings of eligible stocks, we note that Hartalega and Top Glove have fallen to 39th and 40th place. As such, we expect both stocks to drop out of the list. We believe Ambank and QL Resources are the two eligible, highest ranked non-component stocks to be the new entrants. We note that while Hap Seng is higher ranked, our analysis indicates that the stock does not meet the minimum liquidity requirements. We expect significant market volatility through the election week – and the indicative changes above are by no means set in stone. All things being equal, we estimate that if Hartalega’s and Top Glove’s share prices rise above MYR2.17 and MYR0.93, their market cap rankings may rise to 36th or higher. This would enable both stocks to remain in the component stock list.

• Reserve list. We expect the revised FBM KLCI reserve list, comprising the five highest-ranking eligible non-constituents of the index by market capitalisation, to be Westports, Malaysia Airports, Gamuda, Time dotCom and Sunway. The reserve list comprises stocks that would be used if one or more constituents are deleted from the FTSE Bursa Malaysia KLCI during the period, until the next semi-annual review.

• Strategy. We remain in a rising interest rate environment, with no certainty on where the US Federal Funds Rate will peak. Equity markets will likely remain volatile. Investors should ensure sufficient liquidity, to be able 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, as well as strong ESG profiles. We advocate a core defensive stance with an 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, oil & gas, healthcare, basic materials and gaming. We are UNDERWEIGHT on rubber products.

Source: RHB Securities Research - 11 Nov 2022