RHB 2012 Market Outlook & Strategy: Another Challenging Year Ahead

As we head into 2012, a lot of uncertainty remains. On the external front, the euro-debt crisis remains unresolved despite five major attempts to stabilise it. Meanwhile, the economic conditions in the Eurozone are deteriorating rapidly with major indicators pointing to the region entering a recession. A deeper-than-expected recession in the Eurozone would leave few countries unscathed.

In particular, the US economy, which is still in low gear, will likely be severely impacted, while China may also be in for a more severe downturn as effects of potential policy easing will take time to filter down to the real economy.

Slower Eonomic Growth Envisaged For 2012?

The Malaysian economy will not be spared and will likely experience slowing export growth, though this will be cushioned by resilient domestic demand given the progress in the implementation of the Economic Transformation Programme. We expect the country’s economic growth to slow down more significantly to 3.6% in 2012, from +5.0% estimated for 2011. This points to weaker earnings growth, projected to slow from 10.5% to 7.8% during the same period for the FBM KLCI benchmark (ex-Tenaga).

Domestic Demand Likely Be More Resilient

With slowing economic growth, general election and multiple headwinds from the external sector, we believe investors will be in for another challenging year ahead. Given a number of significant risks in the horizon, our end-2012 FBM KLCI target is set at a conservative level of 1,480, based on unchanged 13x 2013 EPS. We expect a volatile 1H with sentiment gradually improving in the 2H as clarity on the global economy improves and investors begin to look forward to an economic rebound in 2013.

Non-election plays?

For investors looking for stocks that are less sensitive to the outcome of the election, we recommend KLK (one of Malaysia’s largest and independent plantation companies, with effi cient yields that have set the benchmark for the sector), Public Bank (large and defensive bank with a conservative and highly-regarded management), Digi (foreign-owned, well-run and in the broadly stable telecom industry) and Parkson (holding company for Parkson Retail Group listed in Hong Kong and Parkson Retail Asia listed in Singapore, with exposure to resilient retail growth in China, Vietnam and Southeast Asia). In addition, Sarawak stocks like HSL, Jaya Tiasa and Ta Ann are likely to be relatively immune, as the state election was already held in April, with two-thirds majority given to the incumbent Barisan Nasional-linked chief minister.

Strategy

As global headwinds remain strong and situations could get worse, we continue to advocate a defensive investment strategy, focusing on high dividend yielding stocks with reasonably good growth potential. Nevertheless, after a period of volatility, a recovery will undoubtedly follow and as such, we believe it pays for investors to accumulate fundamentally-robust stocks on weakness for tactical plays. Sector-wise, our key overweight are telecommunications, gaming, plantation, oil & gas and consumer.

Source: RHB Research Institute