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Friday, March 11, 2016

ECB Cuts Rates, Expands QE - Search for yield will continue


  • The ECB cut its overnight deposit rate to -0.4% from -0.3%. Its main refinancing rate was also cut to 0% from 0.05%.
  • The ECB’s monthly asset purchases are raised to €80bn from €60bn and investment grade corporate bonds are now included in the purchase programme.
  • A new series of 4 targeted longer-term refinancing operations (TLTRO II) will be launched.
  • ECB President Mario Draghi said he does not anticipate further need for monetary stimulus.


  • The massive monetary stimulus shows that the ECB is desperate to defend the Euro zone from deflation risk and is willing to drive interest rates deeper into the negative territory despite the potential backlash on net interest margin of banks.
  • We are mildly positive on the latest ECB stimulus as it prevents further slippage of growth and inflation expectations. We maintain our GDP growth forecast of Euro-area at 1.5% (2015: +1.5%).
  • Despite exceeding market expectations, the impact of ECB stimulus may be muted for the market given the hint of no further stimulus while worries on banks’ earnings may proliferate in the negative interest rate environment.
  • Nevertheless, new addition to global liquidity (higher QE) and initiatives to push interest rates lower will further drive “search for yield” activity and support prices of riskier assets, including equities.
  • Closer to home, latest policy statement by BNM pointed to no OPR cut as BNM prefers to let the fiscal measures work through the economy instead of resorting to monetary easing. Coupled with the removal of fiscal risk after Budget recalibration, this will uphold the interest rate differential and make ringgit assets more attractive.
  • In the near term, we opine that Malaysia’s stock market will still be largely driven by oil price developments but we expect investors’ interest on larger cap stocks with high yield to gain further momentum.


  • Maintain our end-2016 FBM KLCI target at 1,760 based on 15.0x (historical mean) one-year forward earnings.


  • The “search for yield” activity will continue to favour larger cap stocks with high yield especially those with good corporate governance. Within this space, we continue to like the brewers, i.e. Carlsberg (TP: RM13.60) and GAB (TP: RM15.68) reinforced by the removal of risk of substantial excise duty adjustment.
  • Our Top Picks remain unchanged. Maybank, Digi and AirAsia still offer relatively decent dividend yield with attractive valuation.
  • Other Top Picks (in alphabetical order) are Edgenta, Gamuda, IJM, Mitrajaya, SunCon, TNB and Westports.

Source: Hong Leong Investment Bank Research, 11 March 2016

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