Tough times in 2020, says Affin Hwang

VALUATIONS for the Kuala Lumpur Composite Index (KLCI) remain unattractive compared to regional markets, leaving the KLCI with limited options to attract capital inflows, which remain a key driver for the index.

This is despite the KLCI’s underperformance over the past two years, said Affin Hwang Research analyst Kevin Low in his note on Dec 9.

“A challenging macro backdrop and an extension of weakness in the ringgit will make it less compelling to own Malaysian equities. Nevertheless, we do not expect sharp downsides given the KLCI’s defensive attributes and its relatively attractive dividend yield of 3.6%,” said Low.

He noted that external headwinds, in the form of slowing global growth, as well as the prospects of a weaker ringgit may have been downplayed in the current valuations, despite the positives from robust domestic demand, improving fiscal deficit position, and fiscal/monetary policy.

Moving forward, key events of interest include the US presidential elections, which typically leads to a stronger Dow Jones and US dollar. Low noted that, while this may limit capital flows to the KLCI, a strong Dow Jones may lift overall sentiments, reducing pressure overall.

Unfortunately, there is no end in sight for the trade war between the US and China, but the good news is that the positive impact from the prolonged trade war has finally been filtering through, with lower production costs and relocation in supply chains.

Next year will also continue to see a weak ringgit, which “should help with Visit Malaysia Year 2020.” However, Low identified the real beneficiaries of the weak ringgit as the export sector.

Low shared that the research house’s 2020 year-end target for the KLCI stands at 1,660.

“We remain cautious and are positioned defensively in the healthcare sector. An accommodative monetary policy will likely be favourable for the Mortgage Real Estate Investment Trusts (MREITs), while we expect acceleration of infrastructure projects after a lull,” he said.

Low also noted that the electronics manufacturing services (EMS) sector is also favoured for its strong growth prospects, along with rubber products as stronger earnings growth resumes. The plantation sector is also marked as overweight, as “demand-supply” dynamics are favourable, according to Low.

Conversely, the insurance sector is downgraded to neutral, in view of weaker premium growth. Sector underweights were identified as the auto and media industries.

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