Large-cap stocks a safe bet amid growth concerns

PETALING JAYA: As reciprocal tariff negotiations gear up, the Malaysian market is bracing for second-order effects, with investors urged to focus on margin resilience and valuation support amid prolonged trade discussions.

Kenanga Research, in its latest strategy report, highlights that while an immediate resolution is unlikely as the Malaysian delegation heads to Washington on April 25, the broader concern now lies in secondary impacts such as currency shifts and global growth worries.

“As negotiations on reciprocal tariffs get underway, a deal may take time to reach, and we are mindful of second-order effects that are kicking in, including currency impacts, and broader slowdown concern,” the research house said.

Based on a bottom-up assessment of the FBM KLCI constituents, Kenanga Research projected that earnings growth in a more stressed scenario could still come in at about 2% in 2025, underscoring a relatively attractive valuation backdrop.

“Such earnings would still map to relatively attractive valuation levels, supporting our backing for large-cap stocks for now,” it noted.

The research house has not observed widespread front-loading among exporters.

“From our channel checks on tariffs, we haven’t seen widespread front-loading impact from our exporters, and we note rerouting of trade are still in talks,” it said.

Still, Kenanga Research sees reasons for selective optimism in Malaysia’s technology sector, which generally enjoys better margins compared to regional peers.

“If some levels of tariffs were to come into effect, there is a silver lining for Malaysia in that margins, especially in the tech space, compare well in this region,” the research house stated.

Kenanga Research, however, cautions that any prolonged uncertainty in the tariff talks could lead to ripple effects across various sectors.

“We examine some of the second-order effects if discussions are more drawn out, and reactions by corporate Malaysia.

“US dollar weakness is still playing out, which could benefit those with dollar-denominated debt,” the research house added, naming planters like IOI Corp Bhd and Kuala Lumpur Kepong Bhd as likely beneficiaries.

On the earnings front, Kenanga Research’s bottom-up modelling suggests that FBM KLCI’s earnings growth could moderate to 4.4%, down from the previously expected 6.8%, under a mildly stressed scenario.

The risks, it said, are particularly concentrated in banking and consumer stocks.

In the event of a more severe downturn, earnings growth could be pared back further to 2.2%.

“Up to four percentage points of earnings growth could be at risk, but we still see potential growth,” Kenanga Research said, pointing out that even “stressed earnings would still map to a relatively appealing valuation.”

It kept its end-2025 FBM KLCI target at 1,690, implying a forward price-earnings multiple of 15.5 times.

“We maintain our 1,690 target for FBM KLCI, where we expect risk premiums to recede along with uncertainty once the United States proceeds with negotiations with key nations such as China,” it said.

On sector positioning, Kenanga Research sees positive risk-reward in banks despite recent declines.

“At this juncture, given the 7% decline in the KL Finance Index, we believe that the fall is excessive juxtaposed against our more sensitised case earnings of a 2.1% contraction in the FBM KLCI banking stocks,” it said.

The research house’s preferred picks include AMMB Holdings Bhd, Malayan Banking Bhd and CIMB Group Holdings Bhd in the financial sector; Telekom Malaysia Bhd and TIME dotCom Bhd in telecommunications; and Dialog Group Bhd in oil and gas.