WITH the global equity market consolidation expected to deepen in the coming months amid a steep US monetary policy tightening, UOB Kay Hian Research expects its prescribed high-yield and defensive plays to outperform.
While the US equities remain surprisingly resilient thus far despite heightened inflation and fears of stagflation/recession (amid the flattened or inverted US bond yield curves), the upcoming steep US monetary policy coupled with the S&P 500 Index’s ‘complacent’ forward price-to-earnings ratio (P/E) valuation suggests significant downside in the coming months, according to the research house.
“While Malaysia’s yield curve and credit spread suggest a relatively sanguine economic outlook, Malaysian equity performance will react to the US market consolidation, and tightened global liquidity could flatten or reverse the year-to-date’s (YTD) impressive foreign fund inflows (RM6.9 bil),” projected head of research Vincent Khoo in a strategy note.
“While seemingly counter intuitive in a rising interest rate scenario, quality yield plays are expected to outperform the FBM KLCI index and deliver positive returns assuming these conditions: (i) equity market consolidation; (ii) moderate 50bp (basis points) rise in overnight policy rate; and (iii) credit spreads in Malaysia remain moderate.”
According to UOB Kay Hian research, its model portfolio of high dividend yielders which comprises many economic and border reopening beneficiaries offer an average prospective 2023 yield of 6.1%, which is a decade high.
“Confirmation of earnings recoveries and the reinstatement to the pre-pandemic dividends should ensure swift re-rating as many of our high yielder stocks remain substantially depressed since the COVID-19 pandemic,” the research house pointed out.
“Interestingly, our model portfolio of high yielders has outperformed the (FBM KLCI) index over the 10-year period.”
In particular, UOB Kay Hian Research foresees outperformance by the real estate investment trusts (REITs), gaming, banks, utilities and selected consumer staples.
Its top picks for the defensive investment theme include high-yielders British American Tobacco (M) Bhd, Genting Malaysia Bhd, Magnum Bhd, Matrix Concept Holdings Bhd, Malayan Banking Bhd (Maybank), RHB Bank Bhd, Sentral REIT and Sunway REIT while the defensive stocks include Heineken Malaysia Bhd, IHH Healthcare Bhd, Time dotCom Bhd and Westports Holdings Bhd.
“While the list generally avoids cyclical companies, Matrix Concepts’ high dividends are assured by its ‘staple’ product offering within the property sector,” added the research house. – April 11, 2022
