PETALING JAYA: Affin Hwang Research believes that there will be no sharp downside to the local bourse despite a challenging macro backdrop and an extension of ringgit weakness, which will make it less compelling to own Malaysian equities.
The research house said the KLCI remains defensive with a relatively attractive dividend yield of 3.6%.
It is maintaining a neutral outlook on the KLCI, projecting a year-end target of 1,660 points for 2020, it said in a note.
Affin Hwang pointed out that after two consecutive years of underperformance, the local market’s valuations remain unattractive vis-à-vis regional markets, leaving limited impetus for capital inflows, a key driver to the KLCI.
“The KLCI recorded a return of -8% year-to-date, mimicking the capital outflows from the market. This could have been due to once-again disappointing corporate earnings and hence unattractive valuations, while an unfavourable rebalancing of the KLCI weighting in the MSCI did not help,” it said.
It also noted that positives from the country’s robust domestic demand, improving fiscal deficit position and fiscal and fiscal/monetary policy muscle have largely been priced into the KLCI.
“However, external headwinds (slowing global growth) and prospects of a weaker ringgit may have been downplayed. Furthermore, any conviction in corporate earnings growth in 2020 may be lacking, after successive years of disappointment. Plantations could be the wild card.”
Some of the things to watch out for next year are the US Presidential election which typically leads to a strong Dow Jones Industrial Average and US dollar, and a weaker ringgit which will help with Visit Malaysia 2020 and benefit exporters.
“We do not see an end to the bitter trade conflict between the US and China. Positive impact from the prolonged trade war is, however, finally filtering through via relocations in supply chains and helping with lower production costs,” said Affin Hwang.
Sectorwise, it remains cautious and positioned defensively in the healthcare sector, while accommodative monetary policy will likely be favourable for the real estate investment trusts.
“We favour the electronics manufacturing services (EMS) sector also for its strong growth prospects, and rubber products as a sector laggard but also as stronger earnings growth resumes. Plantation is upgraded to overweight as demand-supply dynamics are favourable,” it said.
It, however, downgraded the insurance sector outlook to neutral in view of weaker premium growth and has an underweight call on both the auto and media sectors.
Affin Hwang’s top stock picks for 2020 are: QL Resources Bhd, Serba Dinamik Holdings Bhd, KL Kepong Bhd, Scientex Bhd, Apex Healthcare Bhd, Axis Real Estate Investment Bhd, ATA IMS Bhd, Top Glove Corp Bhd, Gabungan AQRS Bhd and ELK Desa Resources Bhd.
