3Q17 Review

• Tepid performance despite favourable macro. In 3Q17, the FBM KLCI and FBM Small Cap dropped marginally by 0.5% and 2.8% respectively despite still-favourable macroeconomic developments (i.e. GDP, trade, IPI).

• Buying interest subsided amid foreign selling. Daily average volume decreased from 2.88bn in 2Q17 to 2.01bn in 3Q17 (-30.2%) as buying interest subsided, while foreign participation was in the profit-taking mode in 3Q17 with an outflow of RM244m (2Q17: +RM4.54bn).

4Q17 Outlook

• 1,740-1,800 range for KLCI. Historically, 4Q tends to perform positively over the past 20 years (70% chance of higher close). Judging from the technical indicators, the FBM KLCI may chart a mild recovery towards year end within a projected range of 1,740-1,800. We have an unchanged fundamental-driven year-end target of 1,760.

• Favourable macro priced in… We opine that market may have priced in the favourable economic developments with 2Q GDP rising to a high of 5.8%. With the expectations of a more moderate growth in 2H17, trading activities on index heavyweights may turn cautious. Moreover, external events such as Trump’s policies, unwinding of Fed balance sheet and the potential interest rate hike could reduce the appetite on emerging market assets including Malaysia.

• ... but firmer commodity prices and ringgit could help sustain sentiments. The stale market environment could be lifted by the steadier recovery commodity prices such as steel and Brent crude oil which trended stronger in 3Q17. Also, the firmer ringgit trend may induce trading activities among domestic-oriented consumer stocks.

Retail Strategy

• Back to basics and fundamentals. Given the slowdown of trading activities in 3Q, we opine that investors should prudently pick stocks with fundamentals throughout 4Q. We advocate stock picks within consumer sector, infrastructure related and stocks with defensive earnings attributes.

• Consumer sentiments to recover. With the recovery in household income (stronger GDP) coupled with firmer ringgit, we opine that consumer sentiments may improve further, translating to stronger consumer spending. Businesses that are consumer-oriented and defensive in nature with decent fundamentals may bode well throughout 4Q.

• Infrastructure-related beneficiary . We believe the news flows for construction may intensify in 4Q with potential contract announcements from rail-related projects such as LRT3, ECRL and HSR.

• O&G thematic play. In tandem with the firmer crude oil prices, share prices of some O&G players which have already at rock bottom may surprise on the upside.

• Top Picks for Retailers : Consumer: 3A, CCK, Johotin. Infrastructure-related: CSC Steel, Fajar Baru, Rohas Tecnic. Defensive earnings attributes: RHB Bank, AWC. O&G: T7GLOBAL, DAYANG.

Source: Hong Leong Investment Bank Research - 3 Oct 2017