We maintain our end-2018 FBM KLCI Index target of 1,900pts based on 17.5x 2018F earnings. This is at a 1x multiple premium to the 5-year historical average of about 16.5x, which we believe is justifiable based on the cyclical upturn in corporate earnings, as reflected in an 8.2% growth in FBM KLCI earnings in 2018F (on the heels of a 3.8% growth in 2017F).
We are positive on the outlook for the local equity market in 2018. We believe the major underperformance of the local equity market vs. its regional and global peers during the final months of 2017, could rightfully be seen in a positive light – that the market was just doing its job by pricing in a higher market risk premium ahead of the 14th general election (GE14) which will have to be held by August 2018.
We believe investors should not overlook a slew of positive factors that should drive the local equity market higher. These include: (1) a mild and gradual rate hike cycle in developed economies; (2) a strengthening ringgit backed by firming crude oil prices and Bank Negara Malaysia’s (BNM) stance, which has turned a little more hawkish; and (3) a robust Malaysian economy, with a GDP growth of 5.5% in 2018 based on our projection, from 5.9% in 2017.
Backed by a cyclical upturn in corporate earnings, we believe cyclical sectors — financial services, property and consumer discretionary — will start to outperform the broader market. We also like certain large-cap names with strong earnings resilience in the construction and power space. Small- and mid-cap stocks could be in the limelight thanks to the government's mandates to GLC funds to invest in this space. Our top Buys are Tenaga Nasional, Public Bank, RHB Bank, Gamuda, Sunway, Bermaz Auto, Kimlun, Luxchem, Prestariang and Berjaya Food. |
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