Defensive play amid regional uncertainty

MALAYSIA’S equity market continues to hold its ground despite regional volatility, with its defensive appeal remaining intact.

Kenanga Research’s latest assessment suggests that while the first quarter of 2025 (1Q25) is expected to be weak, the country is proving relatively resilient compared to its Asean peers.

“Malaysia’s defensive appeal remains. In our outlook, we expected 1Q25 to be weak and Malaysia relatively resilient versus peers. That view is playing out so far, broadly,” Kenanga Research states.

Quarter-to-date, the FBM KLCI has lost 3%, largely due to significant foreign fund outflows, particularly in January.

However, Malaysia still outperforms Indonesia and Thailand, which have seen steeper declines of 6% and 8%, respectively.

Singapore, on the other hand, stands as an outlier, managing to remain in positive territory.

Kenanga Research attributes Malaysia’s relative stability to its stronger-than-expected economic growth. “The above relative performance by Malaysia should also continue to find support from a decent gross domestic product (GDP) print of 5% in 4Q24 that exceeded our and consensus forecasts, as well as the advanced estimates by the Statistics Department (of 4.8%); this contrasts, for example, against a miss for Thailand in its 4Q24 GDP versus consensus.”

Another factor bolstering the nation’s market is its relatively low effective tariffs compared to the Asean average, a potential advantage amid looming global trade tensions, Kenanga Research notes.

Facing pressure

While defensive sectors such as financials and real estate investment trusts (REITs) have performed well year-to-date (y-t-d), thematic sectors have suffered valuation de-ratings due to prevailing uncertainty.

“The more defensive FBM KLCI sectors performed relatively well so far, with financials and REITs standing out as being in positive territory y-t-d.

“This isn’t entirely surprising given that these sectors also promise solid dividend yields.

“Unfortunately, thematics segments, particularly those that have performed well in the past year such as property, construction, utilities, retraced the most,” Kenanga Research highlights.

The emergence of DeepSeek and the artificial intelligence (AI) diffusion interim final rule (IFR) has contributed to this trend.

“Broadly this can be attributable to the effects of emergence of DeepSeek and also the AI diffusion interim final rule.”

However, Kenanga Research sees some of the pullbacks as unjustified.

“In some cases, such as the construction sector, we see this to be less warranted, especially as it remains supported by robust earnings growth vis-a-vis sector price-earnings ratios (PERs),” it argues.

Clarity soon

Uncertainties surrounding US trade policies are a major overhang on the market. However, Kenanga Research believes that clarity may emerge by 2Q25.

“Much needed clarity on United States developments may emerge in 2Q25. US President Donald Trump on Feb 13 signed into effect a ‘fair and reciprocal’ presidential memorandum which started the clock ticking for a ‘reciprocal trade and tariff plan’ to be submitted and tabled within 180 days.

“Trump’s pick for Commerce Secretary has said that the team would have the plan ready by April 1, making that the soonest date such tariffs would be imposed,” it says.

Another key development to watch is the AI diffusion interim final rule, which has a 120-day review window under Trump’s administration.

“In addition, the AI Diffusion interim final rule, introduced during ex-President Biden’s term, also has a 120-day window for any changes under Trump, that is, a deadline in mid-May before it takes effect.

“Both these developments here help us pencil down that some clarity on these policies should begin to emerge likely in 2Q25, which could remove some uncertainty premiums.”

Value opportunities

Kenanga Research highlights stocks that present attractive valuations following recent corrections.

“We screen the names for criteria of) significant PER multiple decline from end-2024, and latest PER being reflective of five-year average or better.

“The results of this two screens show IJM Corp Bhd, YTL Power International Bhd and also PIE Industrial Bhd making the cut,” it says.

IJM, in particular, stands out due to its minimal exposure to data centres and its valuation dipping below its five-year average.

“In particular is IJM, which has relatively low exposure to data centres (7% of order book), has seen its valuations falling below its five-year average (that is, before data centre re-rating) which we believe is unwarranted.”

Meanwhile, YTL Power’s data centre business remains fully discounted at current prices.

“The data centre business of YTL Power also remains fully discounted at current price as our target price without it would be RM3.96, although we believe recent share price weakness also partially reflects lingering dilution concerns from corporate exercise proposed involving unlisted warrants,” Kenanga Research says.

On the technology front, the research house is cautious about NationGate Holdings Bhd’s prospects due to potential impacts from AI regulation.

“Despite NationGate meeting both criteria for the screens, we believe that it its AI server sales momentum, which is its chief growth driver, could be impeded given updated controls under the IFR,” it says.

Strength in construction

Despite sector-wide headwinds, Kenanga Research remains upbeat on the construction sector, recently upgrading Sunway Construction Group Bhd (SunCon) to an “outperform” rating.

“Fundamentally, we continue to have conviction in construction, in which we have recently upgraded SunCon to ‘outperform’.

Together with Gamuda Bhd, both builders are in advanced stage of negotiation to secure new data centres, per our checks, which possibly explains a smaller magnitude in y-t-d valuation de-rating in the table above.”

Conversely, the technology sector has been downgraded to “neutral”, with lower valuation multiples for Outsourced Semiconductor Assembly and Testing firms.

Kenanga Research notes that Malaysia’s direct exposure to impending US steel and aluminium tariffs is minimal, offering some relief to investors.

The research house highlights Hartalega Holdings Bhd as a favoured pick due to its strong exposure to US glove sales as well as its high earnings sensitivity should average selling prices go up.