PETALING JAYA: Given that market sentiment may be weak in the run-up to the 15th general election (GE15), investors should look for sectors that are more agnostic towards the result of the election and with good fundamentals that are closely tied to the performance of the economy, such as the banking sector.

MIDF Research said it continues to be positive on the banking sector and it expects banks’ core earning drivers to remain with strong loan growth and leading indicators, an environment still rich with liquidity to support the said loan growth, lower credit costs and Overnight Policy Rate increase-related benefits to net interest margins.

“Additionally, the banking sector is often synonymous with high deposit yields, with several names offering yields above 4%. This should offset headwinds: namely asset quality concerns, normalisation of operating expenses, heightened deposit competition and still-weak non-interest income sources. Our top picks for the sector are Maybank and CIMB,” it said in a report today.

MIDF expects the local equity market valuation to crawl higher moving towards the end of 2022 from current levels, in line with the expectation of continued positive gross domestic product (GDP) growth in 2023.

However, lingering fears over further delays to the US Federal Reserve pivot may result in equity valuation remaining depressed at below normal historical range due to the negative effect of extended aggressive tightening on financial liquidity and macro performance. Hence its FBM KLCI end-2022 target at 1,520 points or (price–earnings ratio) PER22 of 14.8 times.

“Going into 2023, despite rising recession risk in the US, we expect Malaysia’s macro recovery to remain on track. Our preliminary forecast suggests Malaysia’s GDP growth to moderate but continued rising at circa 4.2% in 2023. Along with the expectation of continued macro recovery, the market consensus is also forecasting the FBM KLCI to register 11.5% year-on-year earnings growth in 2023.”

In addition, the research house believes the market will attach a downside risk to prevailing earnings forecast for 2023. It is notable that the earnings forecast remains unwavering since the beginning of this year despite the increasingly bearish world’s macro expectations.

“Thus, we can expect market valuation to stay below the norm to account for the downside risk to forecasted earnings. Based on the prevailing earnings forecast, our preliminary FBM KLCI end-2023 target is pegged at 1,700 points or PER23 of 14.8 times,” said MIDF.

Kenanga Research, too, advocates investors to seek refuge in domestically driven sectors including banks, telcos, auto makers or distributors, mid-market retailers and construction, amid rising external headwinds, leading up to GE15.

“We believe the government of the day, post-GE15, will continue to be highly supportive of domestic consumption,” it said in a report.

Kenanga is maintaining its end of 2022 FBM KLCI target of 1,500 points, which is based on 15.5 times of its 2022F earnings projection of 9.4%.

“We expect the market to rally on the emergence of a majority government, which we believe is where the market has stacked the odds at present. On the flip side, if the scenario fails to play out, the market sentiment could be significantly dampened,” it said.

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