• After posting marginal gains in 2Q2017 (+1.4% Q.o.Q), the FBM KLCI has reverted to a broadly sideway trend that is seen as healthy to allow some of the 1H2017 gains to be digested and stock valuations to also retreat to a more decent level. However, with valuations already fair and fresh leads still absent, the largely sideway trend on Bursa Malaysia is likely to persist in the upcoming months. We also think that the bouts of volatility could continue amid as market players could hasten their profit taking activities in view of the shallower potential stock price upsides with valuations already fair.

• Nevertheless, we think the FBM KLCI should be well supported at the 1,730-1,750 levels with the firmer domestic economic outlook also likely to aid the earnings growth recovery and translate to firmer stock prices going forward. However, we also think that the near-to-intermediate term upsides could continue to be capped at around the 1,780-1,800 points levels, pending the confirmation of the stronger economic and earnings growth. If the above levels are breached, the key index could head to the 1,820 points level, which would again leave the market at the expensive level.

• Valuations remains toppish, but largely fair with the FBM KLCI trading at 16.2x and 15.3x for 2017 and 2018 respectively, which continues to be at the upper-end of its historical forward averages of 14x- 16x. The FBM EMAS’ PERs for 2017 and 2018 are at 16.6x and 15.3x respectively, also toppish as they are ahead of its historical averages of 13x-15x. The stretched valuations will cap the market’s upsides, in our view, and this will also sustain the market’s volatility at a time where there are fewer compelling buys and fresh catalysts.

• We also continue to think that the toppish market conditions will cap the global markets’ ascend. As it is, global market valuations remains stretched with the MSCI All World Index’s current PER at 20.5x, just a hair lower than the PER of 21.0x in the previous quarter. However, there is also little downside risk for now as the improving global economic prospects will continue to provide ample support to equity markets. The improved economic environment is also poised to manifest in stronger earnings growth prospects with the MSCI All World Index’s earnings growth forecast for 2017 raised further. Also, some of the geopolitical issues earlier in the year have been watered down and this could provide more stability to equity markets.

• We continue to think a longer –term strategy is preferred in view of the already toppish market valuations that are providing few noteworthy near-term buying opportunities. This is especially true in the case of the lower liners and broader market shares that have garnered double-digit gains since the start of the year – more than reflecting the improved earnings growth outlook.

• Although the trading interest on the lower liners and broader market shares has ebbed of late, we still think pockets of rotational plays are available, albeit we also see interests on these plays to be shortlived as market participants will adopt hit-and-run tactics that could limit their upsides.

Source: Mplus Research - 26 Jul 2017