Malaysia Equity Strategy

High Valuations Vulnerable to Negative Macro Surprises

Best performing Asian market YTD; valuations still holding up - Malaysia has been the best performing Asian market YTD, with P/B holding up at 1.45x. Its high valuation, however, is defying trends in other markets and is prompting investors to look elsewhere. Malaysia has fared well as a defensive.

New index target is 691 (1.2x 09E P/B) - With the macro risk rising, the market could fall below the 1.4x P/B it last hit during the 2000-01 recession. EPS growth expectations continue to fall in an uncertain market, and hence our previous bottom-up approach was losing relevance. Taking a more cautious approach, we are now using as our benchmark the average Asia P/B of 1.2x - implying a further 17% decline in the KLCI, to 691 points.

Bear market to bottom earliest in 1Q09E - In three of the last four recessions, the bear market ended in or immediately after the worst quarter of GDP growth. Our economist forecasts GDP to bottom at around 2.0% in 1Q09, down from 2.6% in 4Q08. If history repeats itself, 1Q09 is the earliest the market could bottom.

Macro risks - Relatively resilient private consumption, which accounts for half of Malaysia's GDP, has so far saved the economy. At risk is 1Q09 GDP, which could fall sharply before staging a mild rebound in 2H09. The market has yet to fully discount a potential disappointment in GDP numbers.

Further downward EPS revisions for 09 - We have cut our 09E EPS growth further post the 3Q results. We are now forecasting -11.1% growth, down from -3.9%. Utilities are forecast to record -23.7% EPS growth, banks -8.3%, telecoms -14.4%, plantation -20.6% and tobacco -10.5%.

Go for stocks with low P/B or high earnings visibility - Be they cyclical or defensive, stocks trading at trough P/Bs or have strong earnings visibility are on our top buys list - AMMB, BCHB, IGB Corp, KLCC Property, Tanjong plc and IOI Corp. Our top Sell ideas are Public and Maybank.