Outlook

• FBM KLCI has been rising steadily in recent times. This culminated in it breaking above the previous downtrend line (formed since mid-2014) at 1,816 as well as the 200-day SMA (simple moving average – now at 1,821). The momentum could carry the market higher, especially after the two significant breakouts.
• However, potential upside to our year-end target of 1,880 is now only circa 1%.
• While we still firmly believe earnings growth will remain in the positive territory and not changing our year-end target, the market could experience gyration, especially after the recent impressive run-up.
• Technically, it is normal for breakout point(s) to be retested to reconfirm the change in trend.
• Fundamentally, there are still lingering concerns about US Fed rate hike (albeit delayed to 3Q), oil price movement and its impact on the government’s revenue and the country’s Current Account, 1MDB issues, the traditionally volatile month of May (which coincides with reporting season for CY1Q15 and unlikely to excite due to uncertainties ahead of GST) and potential Fitch rating downgrade during its next review in May/Jun.
• While risks persisted, we believe any volatility is unlikely to be as severe as we had experienced during the mid-2014 and end-2014 selldown. This is premised on: 1) cumulative net foreign inflow has already halved from its peak; 2) liquidity is still ample; 3) potential Fitch downgrade already somewhat factored in by investors; 4) Invest Malaysia in late Apr; and 3) unveiling of 11 MP in May.

Target

• End 2015 FBM KLCI target unchanged at 1,880 or based on 15x 2016 earnings, pegged to historical average of 15.2x.

Risk

• Global - Sooner-than-expected US rate hike, worst-thanexpected performance of global economies, Greece exit from EU and geopolitical.
• Country specific – further plunge in oil price, foreign massive selldown, earnings disappointment, 1MDB issues and potential Fitch downgrade.

Strategy

• Given expectations of gyration ahead, we are still advocating investment strategy based on a combination of defensive and value proposition from 5 major themes (but with slight modification): 1) benefit from sector upturn; 2) resilient and/or visible earnings growth; 3) high yield and/or defendable earnings; 4) US$ and/or raw material beneficiaries; and 5) battered fundamental stocks with emergence of value. We also view any gyration as opportunity.
• Top picks are Air Asia (# 4 & 5 above), Axiata (2 & 3), Evergreen (4), Faber (2 & 3), IJM (1), Maybank (3), Mitrajaya (1), QCT (3), SKPetro (5), TNB (2 & 3) and Unisem (1).

Source: Hong Leong Investment Bank Research - 9 Apr 2015