KLCI is up 15% YTD, but remains a laggard in the region In our view, premium valuations and limited scope for earnings surprises at the start of the year have led to the Malaysian market underperforming most of the region year-to-date.
However, we think positive policy moves by the Malaysian government and a less bearish global outlook could slowly reverse this trend. Valuations have spiked-up: Likely pricing-in potential earnings surprises With the recent rally (KLCI is now at 1,009), our Malaysianstock universe has re-rated from 13.3x 2009E PE and 1.5x trailing PBV at the start of the year to 15.4x and 1.7x currently.
Although this puts our Malaysian stock universe closer to the high-end of its historical trading range, we believe a more conducive environment for positive earnings surprises could anchor a further re-rating.
We see the highest upside risk in banks and plantation stocks Latest banking industry and macro trends indicate that our forecast of zero loan growth and spike in provisions could be too pessimistic, if the recent policy moves by the Malaysian government prove successful.
Similarly, our CPO price forecast of US$550/t in 2009 (implies prices fall 15% in the coming months) could be conservative, if supply-demand conditions remain tight in the vegetable oil space.
Better outlook yet to be reflected in select stocks Maybank, Public Bank, Tanjong, and Resorts World have yet to see a meaningful re-rating, with their valuations largely unchanged YTD.
Plantations stocks appear to price-in a buoyant CPO price outlook, while the most meaningful re-rating has been with SP Setia and IJM.
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