WE think the upcoming general election will be at the forefront of investors' minds in the near term.
Coupled with uncertainties surrounding the US fiscal cliff and the eurozone's debt problems, we anticipate a choppy period for Malaysian equities in the first half of 2013.
We expect an improvement in the market outlook in the second half, assuming Barisan Nasional remains in control and on expectations of improving global economic conditions.
Hence our market strategy is to stay defensive in the first half of 2013 while taking advantage of the market weakness during that period to buy into fundamentally robust stocks for greater outperformance in the second half.
Banking stocks fit in well with our market strategy and could offer investors the best of both halves. The sector's “defensiveness” to tide through the volatile first half would be underpinned by robust and “safe” earnings, inexpensive valuations and decent dividend yields.
As macro conditions improve after that, we see banks as one of the major beneficiaries.
Bank earnings have stayed robust, thanks to earnings that are domestic-centric.
Indeed, while corporate earnings this year have been weak, banks have posted results that were slightly ahead of our and consensus expectations. We believe the earnings upgrade cycle still has legs and investors are increasingly starting to recognise the resilience of bank earnings.
Despite the positive earnings surprises, valuations remain attractive, particularly relative to the FBM KLCI. As economic conditions improve, we expect the valuation gap to close.
Banks have well-articulated dividend policies. With earnings staying resilient, this would aid in terms of visibility for dividends. We see this as the third defensive pillar to help provide support to share prices when markets are volatile.
We expect credit demand to remain healthy and project system loan growth to be sustained at a similar pace as 2012, i.e. 10%-11%.
Lending to the household segment has been growing at a stable pace and will continue to be well supported by the country's young demographic structure, high savings, rising consumerism, favourable labour market conditions and current low interest rate environment, in our view.
Our Overweight stance is unchanged. We think the confluence of factors such as inexpensive valuations, a heavyweight sector and ample liquidity in the system means that the sector should not be ignored, especially for funds benchmarked to domestic indices.
Maybank and Public Bank are our top picks while we advocate a “buy on weakness” strategy for CIMB.