Saturday, January 18, 2014

Strategy Report: Malaysia 2014 Outlook - Regain, Resume, Reaccelerate (M&A)

Strategy Report: Malaysia 2014 Outlook
2014 Year End KLCI Target: 1,980
2013 Year End KLCI: 1,866
 3R: Regain, Resume, Reaccelerate

2014 year-end FBMKLCI target of 1,980 based on forward PER of 17.4x, broadly in line with the pre-liquidity rally average PER (2000-2008). With the market gradually entering normalisation period following the deceleration of US quantitative easing measures in 2014, we believe the local funds will be supportive of the local market reinvigorated by the reacceleration of the economy as the impact of fiscal consolidation will finally bear its fruits. We believe foreign institutions will re-enter the local market in rising speed in the second half of 2014 boosted by improving economic dynamics chiefly emanating from the GST implementation in 2015 and improving fiscal condition.

Promising 2014. The world will finally enter into a period of normal growth now that the world‟s top 3 economy can breathe on its own next year led by the re-charging of the US economy and Japan‟s improving outlook. China economy will grow in a more convincing fashion as the economy embark on massive restructuring effort with private consumption is expected to take the front lead.

Catalyst in 2014. Several factors will shore up the trading sentiment in 2014 including 1) strong global trade growth of 4.5% with strong spill over impact to Malaysia‟s open economy 2) depreciation in Ringgit that will boost export momentum 3) rapid implementation of ETP anchored by RM220 billion of committed investment 4) status quo on OPR 5) reacceleration of top 3 global economies namely the US, China and Japan. Eurozone is the only thorn in the flesh in 2014.

Overweight. We have an Overweight call on auto, banking, construction, media and oil and gas sectors.

2014 Equity Outlook
“3R: Regain, Resume, Reaccelerate”
The global equity market is entering 2014 with a bright prospect courtesy of the re-acceleration of world‟s top 3 economies namely the US, Japan and China. Although the US quantitative easing measures will be slower and in deceleration pace, but the strong trajectory of US economy will be more than enough to offset that. Malaysia‟s fiscal consolidation will be much appreciated in 2014 despite some bitter pill to be swallowed like the adjustment in essential products and services prices.

It can be surmise that the global equity market is entering 2014 with better visibility and barring unforeseen circumstances, we predict FBMKLCI to end 2014 with a new high of 1,980 based on PER of 17.4x, broadly in line with the pre-liquidity rally average PER from 2000-2008. Foreign institutional investors are expected to re-enter the local market in 2H14 driven by improving fiscal outlook underpinned the introduction of GST in 2015 and better fiscal condition following rapid fiscal consolidation these past 1-2 years. With 6.1% y-o-y growth, FBMKLCI is a NEUTRAL call.

Among the catalyst that could catalyze our 2014 year-end target include:
1) Upbeat global and trade growth in 2014
It has been a few years of dilemma for global trade no thanks to the weak economic growth of the world‟s top economies. The brewing of Global Credit Crisis and Eurozone Soverign Debt Crisis have inevitably put a dent to the global trade momentum and that lasted for a few years. 2014 will mark as the year when global trade will turn robust, courtesy of the depreciation in Yen and reacceleration of the US economy. China will benefit single handedly out of this. As if to give a hint on what to come, China‟s November 2013 export growth vaulted to 12.5% y-o-y, among its best since the last 2 years. Global trade is set to grow in blazing pace to 4.5% in 2014 vs. 2.5% in 2013, a marked increase than the global growth forecast (2014F: 2.8%; 2013F: 2.0%) since the last few years which is telling on what to expect in 2014. The spillover effect can be broad based as demand will swell for commodity, shipping and banking products. Open economies like Malaysia, Singapore, Thailand, China, and Hong Kong will benefit immensely. The lifting of regional export momentum, Malaysia included, will stoke trading confidence underpinned by improving macro-economic outlook.

2) Re-acceleration of Malaysia’s 2014 GDP growth
Malaysia‟s GDP is forecast to grow at a solid pace of 5.5% in 2014 against 4.5% in 2013 driven by resilient domestic demand and improving external conditions. Construction sector per se will expand in rapid pace boosted by the rapid implementation of ETP and we expect the floodgate to be opened on MRT2 and MRT3. The government‟s ambition to spend a hefty RM160 billion to improve the transportation system will give a direct impact to the economic generation. The elevated level of crude palm oil (2013: RM2,416 per tonne; 2014F: RM2,600 per tonne) and crude oil (2013: USD98 per barrel; 2014F: USD98-USD100 per barrel) prices in 2014 courtesy of the changing outlook on the global economy will ensure a steady fiscal revenue generation (i.e. duties collection) and wealth creation effect. Nonetheless, the pressure in inflationary rate due to the adjustment in essential goods and services prices at the start of 2014 (e.g. toll rates & electricity prices) will put a dent in Ringgit against the USD. Despite this, Malaysia‟s competitiveness will improve and we can expect the nation‟s export momentum to be upbeat in 2014. With the present government firmly in the driving seat for the next 4 years and all the fiscal plans are ready to be implemented (i.e. ETP), the stage is ready for the nation to charge ahead with vigor and we reiterate our view that the Malaysia will reach a high income nation before 2020. Despite some dent expected on consumers‟ spending in 2014 following the rise in essential goods and services prices, we believe that impact can be contained to some extent thanks to targeted financial assistance like the BR1M 3.0.

3) Rapid implementation of ETP – spring season all year round for construction sector
ETP with its committed investment of RM220 billion will ensure that private investment growth will continue to be robust. This big investment will somehow get a head start in 2014 and we believe that the government will throw in the plan to build the MRT2 and MRT3 in line with its general elections promises. It addition, the government will also spend up to RM160 billion to enhance the transportation system until 2020 and hence, the construction boys orderbook will be filled to the brimmed until then. This will ensure that the construction sector growth will continue to be sizzling until 2020 and the steady award of contract will keep the interest alive in the construction sectors.

4) Status quo on OPR courtesy of ultra-low US Federal Funds Rate
Lending activity in the banking system is expected to be business as usual in 2014 courtesy of the status quo in OPR following the extended period of ultra-low of US federal funds rates. With strong ETP investment as alluded above, we believe the strong corporate loans growth will be more than enough to offset the cool down in household debt following the tough measures introduced in Budget 2014. Loans‟ growth is forecast to grow between 9.0%-10.0% in 2014 from 9.9% in 2013 anchored chiefly by strong corporate loans growth. Nonetheless, accommodative interest rate environment will continue to attract genuine borrowers in the housing market and we believe demand for housing will not be badly dented from the new tough measures. What is missing is perhaps the speculative buyers which consist about 5%-10% of overall housing loans application in the banking system.

5) Ringgit to benefit from inflationary pressure
Ringgit is predicted to depreciate to an average of RM3.25-RM3.30/Dollar next year (2013 average: RM3.15/Dollar) dented by higher inflationary pressure vis-à-vis the US and the status quo of the OPR. The losing steam of the Ringgit against the greenback will be a boon to Malaysia‟s export momentum as the nation‟s competitiveness will improve leading us to predict that export growth is going to be stronger in 2014. Hence, at this stage, we believe that there is an upside risk to the Ministry of Finance export growth forecast of 1.6% next year. Note that the Malaysia recorded a blazing pace of export growth in September (y-o-y: 5.6%; m-o-m: 0.6%) and October (y-o-y: 9.6%; m-o-m: 6.1%) 2013 and this momentum will likely to continue in 2014.

6) Steady economic trajectory of the 3-trio – US, Japan and China
Hanging risk such as high unemployment level, expensive currency exchange and blazing property prices are expected to recede in 2014 leading us to predict a better economic prospect of the US, China and Japan. This will shore up sentiment in the global equity market in 2014.

Source/Extract/Excerpts/来源/转贴/摘录: M & A Securities
Publish date: 07/01/14

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