2H2014 Strategy Market still has upside potential

by **Cals** Wed 02 Jul 2014, 23:01

2H2014 Strategy Market still has upside potential

Business & Markets 2014

Written by RHB OSK Securities Hong Kong

Wednesday, 02 July 2014 08:04

KUALA LUMPUR (July 2): Improving global growth prospects and accommodative policies in major world economies augur well for local equities.
This is now the most underweighted market in the region by foreign investors.
Indeed, Malaysia stands up as the only country in the region that is on track to deliver a stronger economic growth this year and the only beneficiary of an oil price hike should tensions in Iraq escalate.
In spite of the ongoing debate that investors may have become too complacent – and barring geopolitics in Iraq spiralling out of control – a “crash” may still be some distance away. This is given the fact that the recovery in the global economy is far from reaching a boom that will create overheating fears and the need for significant policy tightening. It is just that in a subdued global growth environment, corporates do not have much pricing power and, with rising costs, earnings growth tends to be restrained. This, in particular, would apply to the Malaysian equity market and its potential upside from here on will likely be limited to earnings growth.
Indeed, our 2014 net EPS growth for the FBM KLCI basket has been downgraded to a mere 1.5% after the May results season and post company visits, from 5.7% previously. This is despite the strong 1Q real GDP growth of 6.2% y-o-y, although we expect earnings to improve to 9.2% in 2015. Nevertheless, we remain NEUTRAL on the market, as Malaysia stands out as the only country in the South-East Asia region that is on track to deliver a stronger economic growth this year. It is also the only beneficiary of an oil price hike should geopolitical tensions in Iraq worsen. These, coupled with the Government’s commitment to fiscal reform and improving economic resilience, will likely attract some focus back to the country by the investment community, given that Malaysia is now the most under-owned market in the region by foreign institutional investors.
While the direction of global equities – and the Malaysian equity market – in 2H is likely to be dictated by the strength of the world’s economy (and, on the local front, corporate earnings growth) and, potentially, changes in expectations on the timing and speed of the US rate-hike cycle, policies in the major countries will remain very accommodative and supportive of equities. Consequently, we continue to envisage the market to trend higher in 2H and maintain our end-2014 FBM KLCI target at 1,940, ie about 16.3x 2015 earnings.
As the local market lacks strong investment themes, we are of the view that investors will have to rely on stock-specific ideas to generate alpha levels that are above and beyond market returns to outperform. In general, we see more value in growth sectors and stocks relative to defensives and dividend plays, as economic growth is gaining momentum and will unlikely be derailed. Sector wise, we prefer plantation, oil and gas, construction, property and niche players with operations based on the Sarawak Corridor of Renewable Energy (SCORE).