KLCI hits our 2H2018 base case target of 1630: What next?

The downswing in the KLCI exhibits all the hallmarks of a bear market at this point. 1) Liquidity has been progressively drained out of the market by a drawn-out foreign fund selloff that has drawn in local funds as well as retail participants. 2) Stock valuations remain at elevated levels despite eye-watering drawdowns from peak levels due to a dismal earnings report card for several reporting seasons already. 3) Poor personal income growth following an inflationary bout beginning 2015 that extended into 2017 did no favours for already waning animal spirits among domestic investors. Across the rural heartlands and the myriad little towns that serve them, falling agricultural commodity prices weighed heavily on incomes.

In the near future, too many uncertainties about investment outcomes, and yet hopes are high Tech stocks may boom anew, contingent on a resolution of trade issues but a confidence reboot is still premature. Commodity prices may recover fleetingly in 1H2019 but too late to boost Plantation/O&G stocks. A global slowdown threatens to overshoot, paving the path for a hard landing. The Construction sector is at 2008 levels, a victim of wrecking balls swung by the Parkatan Harapan government at mega projects. Properties, still mired in Bank Negara Malaysia’s macroprudential muck and despite strong demographic trends and low rates, affordability stifles demand. A swift consumer recovery is unlikely as goods prices are sticky downwards. So, sky high sector valuations will not outlast any stock market bounce that unfolds. Loans growth pickup courtesy of a weak Ringgit straining working capital may falter again as the Ringgit stabilizes, maybe dampening optimism for a still inexpensive Finance sector.

Our 1H2018 KLCI target of 1907 was achieved for all intents and purposes with the KLCI cresting at 1896. We were off by 11 index points. We still expect that at its worst valuation level the KLCI will retrace to will least match the –1 Standard Deviation below the mean valuation between[…].

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