Review

• FBM KLCI gained 1.5% in 1Q16, rising marginally to 1,717.6 from 1,692.5 as at end-Dec 2015.
• After a turbulent January, foreigners turned net buyer on Malaysian equities in Feb (+RM0.5bn) and Mar (+RM6.1bn). This was buoyed by improved sentiment after Brent oil price rallied from a low of US$27.88/bbl (20 Jan), Budget recalibration (28 Jan), stimulus by the ECB (10 Mar) and a more dovish Fed (16 Mar) which sparked US$ weakening.

Outlook

• We expect foreigners to slow down their pace of buying in 2Q after a frenzy buying in March (net buy of RM6.1bn) to normalise their exposure in Malaysian equities by end-1Q.
• On the external front, the sustainability of oil price recovery and FOMC rate hike path are key determinants of the market. We expect oil prices to be capped in the near term due to high oil inventory and supply-demand imbalance despite output freeze talk. We maintain our view of FOMC rate hike in June, which will provide comfort that pace is still gradual amid mild economic recovery. Key events to watch are oil producers meeting (17 Apr) and FOMC (26-27 Apr & 14-15 Jun). Both the ECB and BOJ may pause in 2Q to assess impact of monetary stimulus. Japan has already brought forward its fiscal spending to support growth.
• Locally, Zeti’s successor (by end-Apr) will have implication on market strategy. An internally promoted successor would ensure continuity of monetary policy which emphasises on financial stability and sustainable growth. We also expect 1Q GDP growth (13 May) to have eased to 4.0% (bottom for the year) followed by the MPC (19 May) to be chaired by new governor. We expect no change in OPR until end-2016.
• Based on our estimation, the upcoming semi-annual review of FBM KLCI (2 Jun) could see KLCCSS (Hold; TP: RM7.04), SKPetro (Hold; TP: RM1.81) and UMW (Sell; TP: RM5.50) excluded from the Index. Potentially, we expect Gamuda (Buy; TP: RM5.65), IJM (Buy; TP: RM3.86) and Hap Seng (non-rated) to become member constituents.
• Technical readings of FBM KLCI have turned weaker. Amid the expected slower pace of foreign buying, we expect the Index to slip off from the uptrend channel and range bound between 1,670 (200d SMA) and 1,743 (200w SMA).
• Keep our RM forecast of RM3.80-4.00/US$ by end-2016. RM may drift back to RM4.00/US$ in 2Q on lack of catalyst.

Target

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

Strategy

• We continue to advocate defensive stance in larger cap space to weather a potential retracement as well as riding on the growing foreign interest on Malaysian equities.
• Construction a still a clear winner. After the recent surge in contract awards, we continue to expect a strong flow of announcements in 2Q, reinforced by admission of both Gamuda and IJM as KLCI index component stocks.
• Our larger-cap and construction-centric picks have served us well in 1Q. Our top picks for 2Q remain unchanged.

Source: Hong Leong Investment Bank Research - 4 Apr 2016