Rogue forces awaken
● What keeps us awake at night? Answer: Ringgit. Bank Negara’s recent moves have elevated concerns on the Ringgit among foreign investors. We remain cautious beyond the short-term
recovery and expect USD/MYR to depreciate further.
● Foreign investors had been warming up to Malaysia but the Ringgit volatility has overshadowed the promising fundamentals. We see the macro outlook improving, with 2017 GDP rising to 4.5%. The 3Q results season was promising while valuations are more attractive, especially for smaller caps.
● What to watch out for in 2017? (1) General Elections. (2) Trump. (3) China is Malaysia’s white knight. (4) PNB reforms.
● Top picks: Tourism (GENM, GENT, AIRA, AAX); Construction (GAM, IJM); high growth small caps (PAD, KAREX, MYEG), BAB.
Top Outperform picks for 2017:
2017 Outlook—Rogue forces awaken
Malaysia underperformed by 10% in 2016, the third consecutive year of underperformance, driven partly by foreign outflows. The MYR depreciated by 4% against the USD. PM Najib strengthened his political position. Malaysia's consumer sentiment remains weak.
Figure 2: Foreign bond ownership of MGS is now at 48.4%, one of the highest, if not the highest in Asia:
What keeps us awake at night? Answer: Ringgit
Bank Negara’s recent moves to curb Ringgit volatility, by restricting trade on the NDF and exporters’ Ringgit conversion have elevated concerns on the Ringgit among foreign investors, rather than calm the markets. We remain cautious beyond the short-term recovery and expect USD/MYR to rise to 4.50 in 3 months and 4.55 in 12 months. High foreign bond ownership is a concern. Foreign investors hold 48% of MGS, with RM47 bn maturing in 2017 (+50% YoY). We also worry over the risk of a weight reduction in the GBEM Global Diversified index (9% weighting) if poor forex hedging liquidity persists.
Promising fundamentals amid Ringgit fears
Foreign investors had been warming up to Malaysia, but the Ringgit volatility has overshadowed the promising fundamentals.
Macro recovery. We expect GDP growth to rise to 4.5% in 2017 from 4.1% in 2016, and see the macro outlook improving due to the turn in the commodity price cycle. The rising oil price bodes well for sentiment on Malaysia.
A promising 3Q result season. After a good 2Q, the 3Q results season was even better—3Q16 net profit +12.7% YoY and +0.6% QoQ; sales +0.5% YoY and +0.1% QoQ; net profit margins +1.0 pp and flat QoQ. If the current trajectory continues, 2017 will see some earnings growth, after three consecutive years of earnings contraction.
David wins. Small caps are more attractive than big caps. KLCI P/Es are 15.5x in 2016 and 14.5x in 2017, far more expensive than the small cap index P/Es of 10.3x and 8.8x, and small cap EPS growth is superior at 148% and 17% in 2016 and 2017, respectively.
Valuations are more attractive than history. MSCI Malaysia’s P/B of 1.6x is only 7% and 14% above GFC and AFC lows, respectively. This is the lowest the index has hit since GFC.
What to watch out for in 2017?
Malaysia’s 14th General Elections will need to be called before mid-2018. We believe it is later rather than sooner. The Malaysian stock market outperforms the region two to five months before the GE, and underperforms one month after.
A Trump administration is negative for the Ringgit and will result in a more decisive shift among Asian economies towards China. Malaysia is already leaning towards China.
China is Malaysia’s BFF. China's aggressive approach towards Malaysia was welcomed with open arms as China helped 1MDB out of its financial woes and Malaysia needs China’s funding to drive economic growth, but there is no such thing as a free lunch.
PNB reforms. PNB’s new appointments—Wahid and Rahman—could herald reforms in PNB and its companies (key investments include Maybank, Sime, SPSB and UMWH).
Top picks in 2017
Tourism (GENM, GENT, AIRA, AAX); Construction (GAM, IJM); beaten down stock (BAB) and high growth small caps (PAD, KAREX, MYEG). Switch from PBK into CIMB; from MAXIS into TDC.
We are OVERWEIGHT Construction, Gaming, and Oil & Gas. We are UNDERWEIGHT Banks, Power, and Telco.
source: Credit Suisse 5/1/2017
