KUALA LUMPUR (July 29): CGS-CIMB Research has raised its end-2020 FBM KLCI target to 1,550 points (from 1,496 points) based on unchanged P/E target of 16x.

In a strategy note July 28, the research house said it raised its KLCI earnings forecasts to reflect higher earnings forecasts for glove makers.

“We now expect KLCI earnings to contract 10.2% in 2020F (versus 11.2% previously) before rising by 20.8% in 2021F (versus 18.3%, previously).

“We advise investors to stay defensive and venture into selective cyclicals that offer deep value for those with higher risk appetites. The five themes for 2H20 are: (1) GE15 play; (2) M&A/Deep value; (3) dividend yield play; (4) Covid-19 beneficiaries; and (5) Covid-19 recovery play,” it said.

The research house maintained its top three picks (Tenaga Nasional Bhd, Top Glove Corp Bhd and Yinson Holdings Bhd) and preferred sectors (gaming, oil and gas, EMS, gloves and healthcare).

CGS-CIMB said the rally in the KLCI from the year-to-date trough has been fueled by liquidity injected via stimulus measures and cuts in OPR rate to a record-low of 1.75% in July.

“We think the sustainability of the rally is dependent on the pace of the economic and earnings recovery from Covid-19 against market expectations.

“Key risks are when glove makers hit peak quarterly earnings, retail interest wanes and/or projected corporate earnings recovery disappoints,” it said.

The research house said it expects the market to remain volatile in 2H20 due to uncertainties on the pace of the global economic recovery as social distancing and intermittent periods of mandated lockdowns are set to be the norm in 2H20 and 2021 until effective, mass-market treatments and vaccines are available or until the infectiousness and fatality of the Covid-19 virus reduce to an acceptable level.

“Our key concerns going into the 2H20 lie in the ability of corporate earnings to recover to pre-Covid-19 levels, when stimulus measures progressively end in 4Q20, as the market appears to have already priced in this potential,” it said.