UOB KayHian on Malaysian market

Time and again, I have presented my views on the danger of Malaysian institutional funds (like EPF, KWAP) distorting the market. Here are the views of UOB Kayhian (Vincent Khoo).

In my earlier article, I have mentioned of it getting tougher to pick stocks as I am finding the valuation is getting full. Nevertheless, I am finding some stocks to be still attractive and will present them these few days.


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Mixed institutional investor feedback. We presented our market strategy outlook to clients in Asia. Foreign institutional funds, which we met, were generally UNDERWEIGHT on Malaysia and continue to be wary of Malaysia’s index components’ high valuations relative to regional peers (although we note that foreign ownership has resumed inching up in July to over 24% after easing in June). Meanwhile, we sense that most local institutional investors have raised their equity exposure, although some are taking profits on the more illiquid small-cap stocks. Most investors expect market to weaken when elections are held.
• Market vulnerable to swift profit taking… Overall, we remain cautious of a market selloff as markets would eventually react to deepening recession in Europe and slowing global economic activities, and also noting the calendar effects of a generally weak August-September period (the FBMKLCI fell on average 3% in this period over the past five years). We also highlighted that General Elections (GE) would most likely be delayed to 2013, following the defections of two parliamentarians in Sabah, which should erase the perception of immediate market support ahead of the GE. Overall, we expect the FBMKLCI to trade in a range of 1,500 to 1,650.
• …as risks ignored. We note that the over-compression of dividend yields – as best highlighted in some retail REITs’ net yield spread to the risk free rate of only <150 bp="bp" peers="peers" singapore="singapore" the="the" vs="vs">300 bp spread – demonstrates that downside risks are largely ignored. Many historical yield plays now feature prospective net dividend yields of below 5%, which is only a tad higher than the present 3.7% yield for 10-year Malaysian Government Securities.
• Key investment themes. Under the outlook of a protracted global malaise and low interest rate environment, relevant key thematic plays continue to be; a) yield compression for high-yielding stocks, b) growth in oil & gas, c) lingering M&A plays, d) favourable supply-demand dynamics for rubber glove manufacturers, d) low yield in the plantation sector (more relevant for 4Q12, post the peak production period). Favourite sectors include the number forecasting operators (NFO).
• Looking forward to 2013, five sectors are expected to trade significantly below their historical 10-year mean PEs – Banking, construction, exchange, gaming and plantation (refer to table overleaf). Among these, the construction and casino sectors should outperform given their hefty underperformances this year and emerging catalysts anticipated. The construction sector features strong earnings visibility through 2014 as mega projects roll out, and we foresee renewed interests in casino stocks, which tend to perform post-GE, on the Genting Group’s ongoing efforts to capitalise on new greenfield developments and liberalisation in gateway cities in the US.
Action
• Top large-cap picks are Maxis, Multi Purpose Berhad and Sapura Kencana, while mid-small favourites are Perisai, Top Glove and Tradewinds Plantation. DiGi.Com, a favourite yield compression play, could benefit from the capital management front with the legalization of business trust framework in 2013.