Review

• Small caps and ACE stocks took charge. In 2Q17, the FBM KLCI gained 1.4%, but trading focus was shifted towards small caps and lower liners within the FBM Small Cap (2Q17: +2.1%) and FBM ACE (2Q17: +11.4%).

• Foreign participation still encouraging. Daily average volumes in 2Q17 increased 8.4% to 2.94bn compared to an average of 2.71bn in 1Q17. Foreigners remained net buyer in 2Q17 albeit at a slower pace, scooping up RM4.54bn worth of stocks (1Q17: +RM5.46bn).

Outlook

• 3Q17: 1,740-1,820 range for KLCI. We expect upside of KLCI to be limited at around 1,820 in 3Q17 amid overbought weekly Stochastics oscillator and declining momentum in weekly MACD Histogram. On the flipside, support will be set at around 1,740. Still, our fundamental-driven year-end target is unchanged at 1,760.

• Limited upside for heavyweights… Locally, trading interest in heavyweights is expected to slow down as most of the macroeconomic catalysts have been priced in. Also, softer crude oil prices and weak Ringgit may dampen domestic trading theme. Globally, we expect growth to remain moderate throughout 2H17 and investors may have less to anticipate on Trump’s pro-growth policies.

• ... but trading focus likely remain within fundamentally sound small caps. Trading interest could flow towards the small caps with solid fundamentals catalysed by themes related to input cost structure, rising of e-commerce and export-oriented with steady earnings visibility. The range of Ringgit is likely to hover within RM4.20-4.40/US$ in 2H17.

Retail Strategy

• Focus on stocks with defensive character. The rally euphoria has softened in 2Q17 and we expect the excitement into penny stocks are also likely to slow down further in 3Q17. Meanwhile, trading strategy would be picking stocks with sustainability in earnings coupled with defensive attributes.

• Gloves sector and packaging industry. Projected global demands on gloves and plastics packaging are expected to grow in tandem with advancement in healthcare ecosystem and increasing population. With the help of lower raw material prices and still-weak Ringgit, there is high earnings visibility for these sectors in the coming quarters.

• Rising in e-commerce trend . Implementation of e-payment gateways could ride along the boom in e-commerce.

• Prefer companies with strong net cash and stable dividend payment. In the anticipation of higher volatility in 3Q17, we believe companies with decent valuations, net cash position and dividend yield would cushion any downside volatility throughout the quarter.

• Top Picks for Retailers : Stocks with upside catalysts: Comfort Gloves, GHL System, JCY and Gadang. Defensive with decent valuations: Protasco, Engtex, CSC Steel, Heveaboard, Tex Cycle and Thong Guan.

Source: Hong Leong Investment Bank Research - 7 Jul 2017