Investors should also realise and be ready to embrace the impact of interest rate hike should it materialise. — Bernama photo
KUCHING: 2018 may not be a smooth sailing year forewarned Kenanga Investment Bank Bhd (Kenanga Research), as challengest arise in the normalisation in interest rate, and uncertainties over the new tax reform in US.
On the domestic front, concerns over the impacts of pre and post General Elections 14 are raised as well.
“Sector-wise, we stay overweight on aviation, gaming, real estate investment trusts (REITs) and power utility sectors, while healthcare sector is the only underweight sector,” it said, adding that other sectors are neutral.
“However, we are also monitoring aviation and REITs sectors very closely.”
The performance of airlines such as AirAsia Bhd could be affected should crude oil price remains strong over the next few months, warned Kenanga Research.
“As for REITs, while we believe the movement of MGS yields is less sensitive to US interest rate hike and OPR changes to a lesser extent, higher risk-free rate normally reduces the attractiveness of REITs from a valuation point of view.
“As for gloves and semiconductor sectors, we are pretty selective as we are fully aware of the valuation cycles for these sectors.”
As for risks, Kenanga Research said investors should also realise and be ready to embrace the impact of interest rate hike should it materialise.
“Banks could see a knee-jerk rally for the short-term expansion in interest margin, but asset quality remains a concern for a longer run.
“Investors should also stay cautious over oil and gas players that have high borrowings for their assets. Property counters may see greater selling pressure before buying/trading opportunities emerging.
“Plantations sector may not see immediate rerating catalysts judging from the lacklustre price movement.”
Turning its view on the local bourse, Kenanga Research said due to the recent changes in index constituents as well as the demerger of Sime Darby Bhd, it saw significant changes in earnings growth estimates.
“Our FBMKLCI FY17E/FY18F net earnings growth estimates have been revised from 2.6 and 3.6 per cents to 9.8 and minus 0.2 per cents.
“Changes in constituent aside, 2018 is still likely to see a lower earnings growth as opposed to 2017 due to normalised earnings growth in banks, power utilities and telcos. For FY19, our tentative earnings growth is forecasted at 4.9 per cent.
“Based on the latest numbers and inputs from analysts, we are pegging our end-2018 Index Target at 1,860, implying 16.8 and 16 times of FY18E and FY19E earnings.”