Mar 18, 2014

Malaysian EQUITY : Maintain neutral

asia market

We expect the economy to grow by 5.2% this year, a tad higher than last year due to favourable CPO price and exports. The country has proven to be more resilient to the global macro uncertainty. Fine-tuning policies are in place, which
may bring down potential growth but that should help sustain longer-term fiscal strength. Offsetting this is higher inflation in the near term, which is likely to be reflected in weaker consumption, and the risk for rate hikes in 2H.

The Malaysia equity market is supported by its strong domestic liquidity and is hence insulated against external uncertainties. This also explains why Malaysia is expensive. Its current PE premium to the region is 43% vs a historical average of 18% and a peak of 50%. Although we recently trimmed earnings growth forecast by 1.3% after the results season, more earnings downside from further deficit-reducing measures can be expected.

We maintain our Neutral stance on Malaysia to hedge against volatility risks in 2Q. The two strong domestic sectors which are likely to outperform are construction and oil & gas (O&G). Construction will do better this year, fuelled by better earnings delivery as well as announcements of key contracts such as MRT Line 2, West Coast Expressway (WCE), RAPID and Kwasa Damansara Land civil works. In tandem with the increasing capital expenditure from oil majors in Malaysia, we believe the O&G sector is experiencing a sustainable growth phase. Costing pressure may be rising due to competition, but established players with niche expertise will still be able to sustain their strong earnings momentum. We also like companies with:
(1) Top class management and solid execution; (2) Visible growth drivers; and (3) Small-mid caps

by DBS Group Research