A Year Of Multiple Strategies
We expect a quiet opening to 2014 but a steady ascent to our end-14 FBMKLCI target of 1,900. Our target pegs the index at 15x prospective PE (mean: 14.6x), supported by ample domestic liquidity, mitigating slowing domestic consumption and downside risk to corporate earnings. We advocate a balanced strategy being fairly defensive at the start of the year, but strategically positioning for selected domestic investment themes as the year unfolds.
• A quiet opening but steady ascent. Ample domestic liquidity should allow the FBMKLCI to hug its historical mean PE valuation amid low volatility in 2014, despite a potential domestic consumption slowdown and downside risk to corporate earnings growth. We expect the market to reach the 1,900 level at year-end, pegging the market at 15.0x prospective PE (noting that our index target does not include Tenaga Nasional, which is pending coverage). The 0.2SD premium to its average PE of 14.6x reflects expectations of better economic growth beyond 2014 and a stable political environment,. Overall, we expect the FBMKLCI to mostly trade within the 1,740-1,960 range (-0.5SD to +0.5SD vs mean PE valuations).
• A year of multiple strategies. We advocate a balanced portfolio approach, being fairly defensive at the start of the year, but positioning for selected investment themes as the year unfolds. Stock picking has become more crucial since 2H13 as most large caps now trade in fair-valued ranges. Key investment themes are: a) capital management plays via business trusts and emerging REIT beneficiaries, b) varying opportunities in the oil & gas (O&G) sector, c) mega infrastructure projects that benefit the construction sector, d) impact of electricity tariff hike and the advent of incentive-based regulation (IBR), e) Sarawak Corridor of Renewable Energy (SCORE) beneficiaries, and f) M&A and corporate restructuring.
• Promoting the pawn: Focus on small/mid caps. With rising support from local institutional funds and retailers, some small/mid caps are still expected to deliver princely returns, just like when a chess pawn is “promoted” when it reaches the opponent’s edge. According to Bloomberg data, small-mid caps still trade at about a 6x PE multiple discount to large caps. Besides this, we expect good investor traction for selected laggards and M&A plays.
• OVERWEIGHT the construction, gaming, plantation and telecommunications sectors, and the O&G drilling and production segment. The O&G sector still promises a myriad of interesting thematic investment opportunities. Rising CPO prices should allow the plantation sector to at least relatively outperform the market, if not deliver respectable capital appreciation.
• Our top picks are large caps DiGi.Com, Gamuda, Genting Bhd, Maybank and SapuraKencana Petroleum. Situational plays include IOI Corp, ahead of the listing of its property division, and IJM Corp, while Axiata is also a notable large-cap BUY.
• Our favourite mid and small caps include O&G companies Barakah Offshore Petroleum, Perisai Petroleum Teknologi and Uzma, as well as MPHB Capital.
• NOT RATED stocks which should continue to gain investor traction include large caps Tenaga Nasional (TNB) and MMC Corporation (MMC), and small/mid caps Yinson Holdings (Yinson) and Hong Leong Industries (HLI). Both MMC and HLI are beneficiaries of the M&A and corporate restructuring theme.
• Notable laggards among the stocks mentioned above include DiGi and MMC (a valuation laggard). Telekom Malaysia, the worst-performing FBMKLCI component stock (-14.9% ytd as at 29 Nov 13), is also a candidate for year-end window dressing, although we note that fundamentally, it lacks near-term catalysts. Another notable large-cap laggard is Top Glove, which promises a better year in 2014 as it significantly ramps up its nitrile production capacity.
• Our ‘stalemate’ list includes UMW Holdings, Hartalega, UEM Sunrise, and MMHE.
• Overall slowdown in domestic consumption on the macro front… While Malaysia’s GDP growth is expected to improve to 5.0-5.5% in 2014 (2013F: 4.5-5.0%, based on official government forecasts), led by an improvement in the external sector (ie export growth expected to inch up to 1.6% in 2014 vs 1.2% in 2013 against slower import growth of 2.2% in 2014 vs 4.4% in 2013), domestic private consumption and investment growth are likely to moderate to 6.2% and 12.7% respectively in 2014 (2013F: 7.4% and 16.2%).
• …amid a pick-up in inflation and higher interest rates, … The economic highlights for 2014 are flat government fiscal spending, reduction in subsidies, a modest hike in interest rates, a final nationwide implementation phase of minimum wages (extended to SMEs), and full impact of Bank Negara’s measures to cool personal and property borrowings. We predict a more subdued domestic consumption trend as a result of lower economic multiplier from public spending (as well as the absence of 2013’s pre-general election handouts) and the inflationary effect of subsidy reductions. Inflation would remain elevated through to 2015, with further subsidy rationalisation (in addition to the electricity tariff hike that takes effect on 1 Jan 14), and with the implementation of the Goods & Services Tax (GST) in Apr 15. Meanwhile, our economics team expects a modest 25bp hike in the overnight policy rate to 3.25% (still at a policy-neutral range).
• …suggesting an extended period of subdued corporate earnings growth. While corporate earnings are well-poised to stage a recovery from 2013’s paltry 2.0% growth, earnings growth may still fall short of our expectations. The past four quarterly sets of results have prompted cuts in our earnings forecasts. Currently, we expect corporate earnings to grow 2.0%, 11.3% and 11.0% yoy in 2013-15 respectively.