DBS: Malaysian market weakness is a buying opportunity, but stay cautious

Malaysia ringgit notesMalaysia ringgit notes

Malaysia’s broader market sentiment has remained weak, and that offers a chance to buy, DBS said, but it advised caution and patience.

Malaysia’s blue chips have outperformed regional markets, but small- and mid-caps have suffered from risk aversion amid trade-war fears and election uncertainty, the bank said in a note last week.

“Fundamentally, nothing much has changed for Malaysia as global synchronised economic growth and corporate earnings rebound remain supportive of the equity market,” it said, but it added, “Dampened investors’ sentiment will unlikely be lifted in the near term given the external uncertainty of a trade war which will negatively impact trade-dependent economies such as Malaysia.”

DBS noted that gross exports accounted for 73 percent of Malaysia’s gross domestic product (GDP) in 2017, with China and the U.S. accounting for 13.5 percent and 9.5 percent of gross exports respectively. It added that in a full blown trade war between the U.S. and China, Malaysia’s electronics and electrical goods segment, which includes semiconductors, would be particularly hit.

But while the current broader market weakness could offer a buying opportunity, DBS advised being cautious.

“Amid trade war uncertainty and rising interest rate, equity risk premium is unlikely to get any lower,” it said. “As such, the days of buying high and selling higher on valuation expansion are over. We advise investors to focus on fundamentals and valuation.”

It kept its end-2018 KLCI target at 1950, with large-cap performance expected to be driven by the banks; it forecast earnings growth for the index to accelerate to 10.5 percent this year from 6.8 percent in 2017.

DBS tips top picks

It stuck with overweight calls on banks, electronic manufacturing services, healthcare, and oil and gas sectors, with underweight calls on building materials, particularly cement, and the glove sectors.

DBS tipped its top picks as Maybank, CIMB and Hong Leong Bank as proxies to the banking sector’s cyclical earnings recovery. It also tipped Hibiscus as the best proxy for an oil price recovery, with Bumi Armada and Wah Seong its picks to play a recovery in global oil and gas capital expenditure.

DBS said Yong Tai was its sole tourism sector play as it would benefit from an influx of Chinese tourists when its Encore Melaka theatre opens later this year.

It tipped the electronics manufacturing services sector for cheaper valuation and higher growth than the overall technology sector; it tipped SKP Resources to play the theme.

“The strengthening of the ringgit is not a concern for SKP Resources as its revenue is denominated in ringgit and it has a full cost pass-through arrangement with its key customer,” it said. “Furthermore, given that it does not have any manufacturing plants in China, it is shielded from the ongoing trade war between U.S. and China.”

The KLCI ended up 0.38 percent at 1863.46 on Friday.