Volatility To Greet A New Start

• Despite opening lower at the start of the trading bell, strong buying support in the majority of the index-linked counters sent the FBM KLCI (+1.0%) higher and to halt a streak of four consecutive session of losses on the eve of the General Election (GE14). The lower liners – the FBM Small Cap (+1.2%), FBM Fledgling (+1.0%) and FBM ACE (+2.2%) all recovered most of their previous session losses, while the broader market was painted in green.

• Market breadth turned positive as advancers outstripped decliners on a ratio of 677-to-281 stocks. Traded volumes climbed 22.3% to 2.35 bln shares as bargain hunting activities took precedence.

• Two-thirds of the key index constituents advanced, led by Nestle (+RM1.90), followed by banking giants like Hong Leong Financial Group (+42.0 sen), CIMB (+23.0 sen), Hong Leong Bank (+18.0 sen), Public Bank (+18.0 sen) and RHB Bank (+18.0 sen). Notable gainers on the broader market were Ajinomoto (+52.0 sen), United Plantations (+48.0 sen), TimedotCom (+46.0 sen), KESM Industries (+34.0 sen) and Dutch Lady (+30.0 sen).

• In the meantime, Heineken (-28.0 sen), Fraser & Neave (-26.0 sen), SAM Engineering & Equipment (-10.0 sen) and Ann Joo (-8.0 sen) were the broader market’s biggest losers. Three-A Resources sank 8.0 sen after the latest quarterly results disappointed. There were only five decliners on the local bourse – Maxis (-7.0 sen), IOI Corporation (-2.0 sen), Petronas Chemicals (-2.0 sen), KLCC (-2.0 sen) and Sime Darby Plantations (-2.0 sen).

• Japanese equities advanced as the Nikkei (+1.2%) closed at three-month high, buoyed by the tepid U.S. inflation data that eased concern over rising interest rates. The Hang Seng Index (+1.0%) recorded its fifth straight session of gains with all major sectors in the positive zone. Although the Shanghai Composite fell 0.4%, the aforementioned index recorded its biggest weekly gain on one month, rising 2.3% W.o.W. ASEAN stockmarkets, meanwhile, closed mostly higher last Friday.

• U.S. stockmarkets closed mostly higher as the Dow (+0.4%) registered its third consecutive session of gains as investors continue to digest the tepid April inflation data that only rose 0.2% M.o.M – below economists’ estimates of a 0.3% M.o.M rise. On the broader market, the S&P 500 climbed 0.2%, lifted by the telecommunications sector (+2.1%), but the Nasdaq slipped 0.03%.

• European benchmark indices closed mostly lower as the CAC and DAX fell 0.1% and 0.2% respectively despite trimming most of their intraday losses last Friday. The FTSE, however, added 0.3% to advance for the third straight day as rising commodity prices boosted basic material share prices.

The Day Ahead

• With the change in government, the market may need time to adjust to the new style of governance that has yet to be spelled out until the new cabinet is sworn in. Consequently, this is likely to see heightened volatility among Malaysian stocks due to macro and micro uncertainties as the new government implements its election manifesto that includes the repeal of the highly unpopular Goods and Services Tax (GST).

• Also, we see fresh uncertainties in the implementation of many mega infrastructure projects such as the High Speed Rail and the East Coast Expressways that could affect companies that were recently appointed the Project Delivery Partners for the above projects.

• The uncertainties could also extend the broader construction sector and we expect the sector, as well the building materials manufactures like cement and long steel players, to potentially endure a difficult session. Also, companies that that provide government services may also endure a difficult session as the longevity of their concessions/contracts may be reviewed, as with politically linked stocks that were viewed to be aligned to the previous administration.

• Meanwhile, we expect selected consumer stocks to outperform given the new government’s promise to repeal the GST to likely to have a positive impact on consumer spending in due course. To a lesser effect, the positivity could extend auto, media (lesser restrictions) and banking stocks as they are viewed as potential winners of GE14.

• Although the odds of a knee-jerk reaction to the election result are high due to policy uncertainties of the new government, especially its fiscal and monetary policies with the repeal of the GST that could see a drastic reduction to the government’s coffers, we think any selldown will be short-lived as the new government is bent on restoring market confidence.

• To this end, we think the formation of the Council of Elders, coupled with the promise of reforms and liberalisation of business rules should provide some cushioning effect to the near term uncertainties.

• At the same time, stocks on Bursa Malaysia have largely consolidated over the past two months which we believe is overdone and value is emerging on many lower liners, thus providing longer-term buying opportunities, in our view.

• Amid the potential knee jerk reaction as investors reposition their portfolios, there should be support for the FBM KLCI at the 1,820 and the 1,800 level in an extended selldown. After the 1,850 resistance, the next resistances are at 1,870 and the all-time high of 1,895 points.

COMPANY BRIEF

• Malaysia Smelting Corp Bhd’s (MSC) 1Q2018 net profit tumbled 63.7% Y.o.Y to RM4.6 mln as the increase in average tin prices and the improvement in the group’s production and sales volume were offset by the Ringgit’s appreciation against the U.S. Dollar. Revenue for the quarter decline 12.2% Y.o.Y to RM357.0 mln. (The Star Online)

• Destini Bhd was served with a writ of summons dated 29th April 2018 and a statement of claim dated 22nd April 2018 by the Inland Revenue Board (IRB). The IRB is demanding for the settlement of the outstanding tax payable inclusive of penalties totaling RM6.6 mln for the 2016 year of assessment.

• A suit has been fixed for case management on 21st May 2018 at the Civil High Court in Shah Alam. (The Star Online)

• MyEG Services Bhd’s joint venture (JV) will roll out electronic payment services for the collection of taxes, among others, in Quezon City in the Philippines. The JV in the Philippines, IPay MYEG Philippines Inc, has entered into a service level agreement with the local government of Quezon to act as the latter’s electronic payment gateway service provider.

• Apart from tax collection, the JV will also cater to other services offered by the Quezon local government through its payment channels. The renewable one-year concession would allow I-Pay MYEG to offer its expertise and expand the company’s concessions. (The Star Online)  

Source: Mplus Research - 14 May 2018