Market review

• Led by higher China and Japan markets after the release of solid US manufacturing numbers, the MSCI Asia Pacific Index (MXAP) inched up 0.4-pt to 140.4 amid stabilizing economic data from China as well as better-than-expected Japan’s Markit PMI manufacturing report and smaller than-expected fall in exports data.

• After a 7.8 pts rise post Budget 2017 on 24 Oct, KLCI ended flat after hovering in a tight 1673.2-1679 band as investors locked in gains post Budget 2017. Trading volume decreased to 1.43bn shares against Monday’s 1.64bn shares while market breadth was negative with 334 gainers as compared to 422 losers.

• The Dow continued its tight range bound pattern ahead of the widely-watched FOMC meeting (1-2 Nov) and US presidential election (8 Nov) as the index fell 53 pts to 18169. Sentiment was dampened by mixed forecasts from industry giants (i.e. 3M, Caterpillar, GM and Apple), sluggish consumer confidence and falling oil prices ahead of weekly EIA inventory data (tonight). Verbal squabbles among between OPEC members also created uncertainty about a potential output cut.

Technical view

Must stay above 1675 to drive CI higher

• We reiterate our view that only a decisive break above immediate resistance of 1675 (19 July high) will trigger a resumption of rally to retest the 1684 (61.8% FR), 1692 (8 Sep high) and 1700 psychological barriers. Failure to do so will witness KLCI to continue engaging in sideways consolidation mode with key supports at 1657 (38.2% FR) and 1645 (20 Sep low).

Market outlook

• Overall, KLCI may continue to trade in tight range bound pattern for a while pending the outcome from the upcoming US FOMC meeting and US presidential election. Once these uncertainties remove (assuming no negative surprises as markets have priced in a Hillary victory and a Dec rate hike), KLCI will gradually inch higher in anticipation of a better Malaysia 3Q16 GDP and lesser disappointment of the upcoming Nov 3Q16 results season, which would eventually to lift KLCI 2017 earnings to grow 9.5% after posting a 3 consecutive yearly decline.

• Trading Buy idea (FGV). FGV is trading at 1.25x P/B, which is 34% below its 10-year average of 1.91x and 41% below its peers’ P/B of 2.14x, supported by 2016-2018 earnings CAGR of 56%. We believe such huge discounts and ongoing rally in CPO prices are likely to see share prices hitting bottom soon with a technical rebound in the offing towards RM2.25-2.52 in the medium/long term. Key supports are RM2.00-2.11. Cut loss at RM1.99

Source: Hong Leong Investment Bank Research - 26 Oct 2016