High-Yield And Defensive Plays
With the global equity market consolidation expected to deepen in the coming months, amid a steep US monetary policy tightening, our prescribed high-yield and defensive plays will outperform. We foresee particular outperformance by REITs, gaming, banks, utilities and selected consumer staples. Top high yielders and defensive picks: BAT, GENM, Heineken, IHH Healthcare, Magnum, Matrix Concepts, Maybank, RHB Bank, Sentral REIT, Sunway REIT, Time dotCom, Westport.
WHAT’S NEW
• FBMKLCI’s near-term outlook swayed by anticipated US equity consolidation. While the US equities remain surprisingly resilient thus far despite heightened inflation and fears of stagflation/recession (amid the flattened or inverted US bond yield curves), the upcoming steep US monetary policy coupled with the S&P 500 Index’s ‘complacent’ forward PE valuation (see Figure 2 and 1 overleaf) suggests significant downside in the coming months. While Malaysia’s yield curve and credit spread (Figure 4) suggest a relatively sanguine economic outlook, Malaysian equity performance will react to the US market consolidation, and tightened global liquidity could flatten or reverse the ytd’s impressive foreign fund inflows (RM6.9b).
• High-yield plays should outperform… While seemingly counter intuitive in a rising interest rate scenario, quality yield plays are expected to outperform the FBMKLCI index and deliver positive returns assuming these conditions: a) equity market consolidation, b) moderate 50bp rise in overnight policy rate, and c) credit spreads in Malaysia remain moderate.
• …with the average yield of our selected yield plays reaching a decade high. Our model portfolio of high dividend yielders, which comprises many economic and border reopening beneficiaries, offer an average prospective 2023 yield of 6.1%, a decade high (Fig 5). Confirmation of earnings recoveries and the reinstatement to the pre-pandemic dividends should ensure swift re-rating as many of our high yielder stocks remain substantially depressed since the COVID-19 pandemic.
• Interestingly, our model portfolio of high yielders has outperformed the index over the 10-year period. Backtesting the performances of selected BUY- and HOLD-rated high yielders (refer to Fig 7 footnotes for the stock list) show significant capital appreciation and total return outperformances over the past decade (Fig 7 and 8).
• Appealing defensive stocks. Meanwhile, this report also spotlights defensive stocks which will significantly outperform during market consolidation (see table on the right). Our model on high-yielding (<5% yield) defensive stocks are mainly selected based on the following criteria: low <1.0 beta, resilient cash flows, and reasonable trading liquidity. Consumer, healthcare and logistics stocks take prominence in this category.
ACTION
• Our top picks for the defensive investment theme include high-yielders British American Tobacco (BAT), Genting Malaysia (GENM), Magnum, Matrix Concept, Maybank, RHB Bank, Sentral REIT, Sunway REIT, and defensive stocks Heineken, IHH Healthcare, Time dotCom and Westports. While the list generally avoids cyclical companies, Matrix Concepts’ high dividends are assured by its ‘staple’ product offering within the property sector.