■ Stronger-than-expected headwinds drag the KLCI lower in 2016, the third
■ consecutive year of declines. We predict a challenging 1H17 for the market, followed by a stronger 2H17.
■ Top 1H17 themes are strong US$ play, pump priming and small-mid cap scheme.
■ Preferred big cap picks for 2017 are Tenaga Nasional, Sime Darby and IJM Corp.
■ We maintain our KLCI target of 1,820 pts, based on 16x forward P/E.
FBM KLCI’s 2016 Main Events:
What went wrong and right for us in 2016
We had predicted Malaysia would face numerous headwinds in 2016, including slower economic growth and an uncertain external environment. As expected, 2016 was less volatile compared to 2015. However, the headwinds (weaker corporate earnings, strong US$ and slower growth) turned out to be stronger than expected. These, coupled with two unexpected global events (Brexit and Trump’s victory), resulted in a YTD KLCI underperforming our expectations and declining for the third consecutive year in 2016.
2017 could be a year of two halves
We are projecting a challenging 1H17 as we expect consumer spending growth to remain weak ahead of the general elections (GE14). This, coupled with the 4% YTD fall in RM vs. US$ as well as uncertain global policies, could negatively affect sentiment and foreign investment. We expect some of the uncertainties hanging over the market to clear up in 2H17. Our predictions are premised on M&A activities picking up, higher commodity prices flowing through to the economy, a potential post-GE14 relief rally, and the ringgit rising towards its fair value of RM4.10/US$1.
Seven key themes for 2017
We have identified seven themes for 2017: 1) beneficiaries of US$ strength – rubber gloves and agribusiness companies; (2) pump priming and China investments – construction and infrastructure; (3) dividend yield play – utilities and banks; (4) tourism play – airlines and gaming; (5) GLC transformation – conglomerate; (6) small-mid cap research fund and scheme – small cap; (7) GE14 plays – GLC stocks.
Our top sector picks
Our top sector picks are utilities, construction and small caps. In line with our cautious view on the market for 1H17, we chose utilities for its defensive earnings, construction for potential jobs rollout and award of projects ahead of GE14, and small caps as potential beneficiaries of the launch of the small-mid cap research scheme.
Preferred stocks
Our top big cap picks are Tenaga Nasional for utilities exposure, IJM Corp for the construction sector, and Sime Darby for plantation and PNB transformation. Our top 3 smaller caps are MyEG for the foreign workers permit renewal windfall from the amnesty programme, Karex for its strong market positioning and US$ play, and Sasbadi for its defensive business with strong projected earnings growth from iL-Ace.
Maintain 1,820 KLCI target for end-2017
We reiterate our end-2017 KLCI target of 1,820 pts based on 16x P/E, which is in line with its three-year moving average. We believe the target is achievable as most of the bad news have been priced, in our view, judging from the low foreign shareholdings and the three consecutive years of declines. We project that market earnings will rebound by 10% in 2017.
source: CIMB Research Dec 21
