Current KLCI: 1,686 (28 Aug 2013)
YE KLCI target: 1,840 (under review)
How much more? The KLCI is down 0.2% YTD (-8.4% in USD terms) after falling 124 points or 6.8% from a high of 1,810 on 24 July, a victim of broad-based selling as foreign investors exit the region and emerging markets. The KLCI now trades at 14.3x 2014 earnings, having shaved a 1.0 multiple from its high at 15.3x. The question now is how much more downside, as the US looks set to cool down its liquidity party and Malaysia’s weakened macroeconomic balance (current account + fiscal balance) come at a time when risk appetite for this region is waning. Domestic fiscal reforms will reinstill confidence. We take the view that this will be acted upon in the 2014 National Budget, and possibly as early as next week following the Fiscal Policy Committee meeting.
The big picture. Malaysia’s 2Q13 real GDP grew a respectable 4.3% YoY, while its current account has stayed in surplus although narrowed sharply. Positively, the government’s budgetary balance improved with a smaller deficit of 1.9% of GDP in 2Q13 (1Q13: -6.4% of GDP), bringing 1H13 deficit to 4.1%, tracking its 4.0% target for 2013. We now expect 2013 real GDP growth of 4.5% (previously +5.3%, 2012: +5.6%) and a smaller current account surplus at 2.8% of GDP (previously
+5.5%, 1H13: +2.4%). This assumes a mild improvement in external demand conditions in 2H13, lifting exports and commodity prices, to preserve a surplus in the goods trade account. For 2014, we forecast 5.2% GDP growth and current account surplus still (+2.3% of GDP).
Fiscal discipline. We expect the government to act on the weakened macroeconomic balance by announcing measures as soon as next week post the inaugural meeting of the Fiscal Policy Committee (FPC), announced back in June 2013. In addition, there is the upcoming 2014 National Budget to be tabled on 25 Oct. Resumption of the subsidy rollback suspended since mid-2011 will be a key feature. At the same time, we expect the government to review and reprioritise some infrastructure and real estate projects like the KL-Singapore high speed rail, southern (Gemas-JB) double track rail and government land developments in the KL CBD to avoid a further strain on its balance sheet (including guaranteed debts). These projects may be stretched over a longer implementation timeline or deferred for the time being. While we do not foresee the Goods and Services Tax (GST) coming on board next year, we will be on the lookout for more clarity on its implementation timeline.
Reassessing trough. The KLCI now trades at 14.3x 2014 PER, while it has been supported in the past at around 13x (-1SD is 13.4x), except during the global financial crisis (GFC) when it hit 11.2x. The GFC selldown was exacerbated by a high foreign shareholding of 26-27% in Malaysian equities, in end-2007/early-2008. We do not expect the KLCI to revisit the 11x PER level as the external situation is different today with global macros improving, compared to a recession brought on by the GFC. Using past experience as a guide, the KLCI should find support again at 13+x PER (14x = KLCI 1,660), as more values will emerge. Foreign holding is lower today at < 24% (July 2013: 24.6%).
Reassessing strategy. We put our 2013 YE KLCI target, which is based on 15.5x 2014 PER, under review as we clear the 2Q13 corporate results reporting season. Amid uncertainties, the Economic Transformation Programme (ETP) thematics may no longer be compelling, and we turn to basics for stock picks. Stocks that we think meet most of these criteria – resilient growth path already outlined, proven and strong management, unstretched balance sheet, and M&A potential to unlock values – are AMMB, BIMB, IOIC, TDC, Digi, IJMC, Glomac, AirAsia, Hartalega, QL Resources and Bumi Armada. We position to accumulate on any further market selldown.
Publish date: 29/08/13