1H22 Outlook: Optimistic On Some Market Lift-off

We remain optimistic for a market upswing at the start of the year as investors should be shrugging off fears over the Omicron coronavirus variant, and once again price in the region’s economic and border reopening. However, go defensive in 2Q22 as the market refocuses on global monetary policy tightening, in anticipation of policy rate hikes by major central banks. Our year-start top investment themes remain the economic reopening, a commodity supercycle and selected growth stocks.

WHAT’S NEW

Anticipating a moderate market lift-off at the year start, fuelled by reopening hopes. As hoped, the highly infectious Omicron variant has thus far proven to be a milder strain since its discovery over a month ago, and as such, we expect most governments (inclusive of Malaysia =) around the world to soon loosen up movement restrictions. This will rekindle investor interests in economic/border reopening sector beneficiaries such as the tourism-related, commodities, logistics, REITs and banking.

Market liquidity and risk indicators remain supportive for equities. Key measures of equity market volatility and risk premiums remain supportive of global equities, such as the relatively low levels of VIX and US credit spreads. In addition, the US yield curve has somewhat steepened in recent months, which we partly attribute to easing concerns that high inflation would create a stagflation in the US economy. In Malaysia, the 10-year Malaysian Government Securities yield of c.3.6% and credit spreads remain benign.

However, we still anticipate market consolidation by 2Q22 to reflect the completion of the US QE tapering programme and onset of the country’s policy rate hikes. UOB economics team expects the US Fed to raise its policy rate three times (75bp) in 2022, and Bank Negara Malaysia to raise the overnight policy rate (OPR) by 25bp.

End-22 FBMKLCI target at 1,635, based on 16.2x 2022F PE (historical mean). Our target is conservative relative to our bottom-up target of >1,700.

Palatable investment themes include economic reopening, commodity supercycle, selected export-oriented growth stocks and high dividend yielders, with the latter theme expected to gain prominence from 2Q22. The commodity theme should gain traction in the upcoming ‘super’ results season. We still foresee some trading opportunities in domestic investment themes related to GE15 and the digital economy (cloud migration, digital banking licence award, e-government).

OVERWEIGHT: a) reopening plays, particularly tourism-related (eg gaming), hard commodity stocks and banks; b) high-yielders such as Astro Malaysia, British American Tobacco, real estate investment trust (REIT); and c) prominent exporters in the electrical and electronics (E&E) and medical device segments.

ACTION

• Our top picks are Astro Malaysia, CIMB Group Holdings (CIMB), Genting Malaysia (GENM), Inari Amertron (Inari), My EG Services (MYEG), Press Metal Aluminium Holdings (PMetal), Telekom Malaysia (TM) and VS Industry (VSI).