Review

• Market rally in 1Q17 amid macro recovery. 1Q17 staged a turnaround in market sentiment, with the FBM KLCI rallying 6.0% from end-2016. Buying interest was buoyed by improved macro conditions and corporate results. There was spillover to lower liner stocks, with FBM Small Cap rallying 16.1% in 1Q17.

• Local bourse supported by strong volume. Overall market volume rose to an average of 2.71bn in 1Q17 vs 1.47bn in 4Q16. With the improved buying interest from foreigners, YTD net foreign inflow stood at RM5.73bn vs. net outflow of RM2.48bn in 2016.

Outlook

• 2Q17: 1,720-1,780 range for KLCI. Technically speaking, the FBM KLCI is overbought (Stochastics) on the weekly chart and could be looking for a pullback towards the 1,720- 1,740. However, upside could be capped around 1,780. Our fundamental-driven year-end target is unchanged at 1,760.

• Heavyweights may take a breather... We expect profit taking activities to set in after a decent rally in 1Q17 in the absence of fresh domestic catalyst. Externally, focus would be on Trump’s trade policies, French election, discussion on extension of crude oil production cut and FOMC meeting.

• ... but still plenty of catalysts to keep market warm. Focus could flow towards the lower liners catalysed by restructuring theme, construction projects and property re rating. A stronger ringgit trend may spur interest on ringgit beneficiaries (auto, aviation, consumer, power). Barring an event-driven US$ strength, we expect ringgit to inch higher to RM4.30-4.40/US$ in 2Q17 in line with BNM assumption.

Retail Strategy

• Focus on stocks with catalyst. While penny stocks may continue to dominate the retail market, we opine that rally euphoria could soften in 2Q17 and trading strategy would be picking stocks with catalysts and supported by fundamentals.

• Construction and GLCs. Infrastructure projects (i.e. packages from MRT2, LRT3 & ECRL) and expedited progress of PR1MA may support jobs flow within construction sector in 2Q17. This is also associated with election-theme that may keep market warm during the quarter.

• Mild re-rating for property sector. Following the IWH IWCITY deal, we opine that property companies may be ripe for a re-rating as most of property stocks are currently traded at significant discount to their P/B ratio and RNAV.

• Currency catalyst may come in as booster. We believe if Ringgit were to strengthen to RM4.30-4.40/US$ range, importing sectors / foreign debt-denominated companies might benefit from a stronger local currency.

• Top Picks for Retailers : We recommend two sets of stock picks for retailers. First set comprises stocks with upside catalysts: Brahims, Tan Chong, UEMS, Pesona and Destini. Second set mainly for conservative investors looking for fundamental with decent dividend yields: Uchitec, Sunway, Kumpulan Fima, YSP Southeast Asia, and Tunepro.

Source: Hong Leong Investment Bank Research - 3 Apr 2017