Market Review

• Despite an overnight 73 pts recovery, Asian markets closed mixed yesterday (led by falling markets in SHCOMP 1% and HSI 0.9%) as sentiment remained on the edge following a massive 2-day 540 pts selloff on 29-30 Jan. The combination of profit taking into month-end after recent rallies, higher US bond yields, stretched valuations and Fed’s signal of first rate hike in 2018 put pressure on equity values.

• Prior to the 31 Jan-1 Feb holidays, KLCI eased 1.9 pts to 1868.6 after traded in a volatile session within intra-day high of 1872.7 and a low of 1861.6. Despite the marginal fall, KLCI rallied 73 pts or 4.4% in Jan. Market breadth was negative with 252 gainers against 794 losers. Overall trading volume increased to 3.25bn shares worth RM2.89bn as compared to Monday’s 3.0bn shares worth RM2.49bn.

• Ahead of the widely-watched Jan jobs data tonight, U.S. stock indexes ended mostly lower. Following the 2-day 540 pts selloff on 29-30 Jan, Dow rose 37 pts from intraday losses of 135 pts to finish at 26186, recording its 2nd day of technical rebound. Sentiment was cautious amid fears of rising inflation and signs of tightness in the labour market which imply prices might pick up sooner than Wall Street has been expecting, compelling the Fed to accelerate its pace of interest-rate hikes as early as 20-21 March FOMC meeting.

Technical View

Choppiness ahead amid overbought technicals

• On the back of heightened volatility on Dow as well as current overbought signals, KLCI is likely to brace for further profit taking pullback after surging 4.4% in Jan. Key resistances are 1880-1897 while immediate supports fall on 1850-1860.

Market Outlook

• On the back of higher US bond yields (+0.08% to 2.79%), stretched valuations and Fed’s signal of first rate hike in 2018, sentiment is likely to remain edgy on Dow. Key resistances are 26.4-26.6k pts while supports fall on 25.3- 25.8k zones.

• On Bursa Malaysia, we think the negative sentiments in Wall St may spillover towards Malaysia’s equities. Nevertheless, given the Ringgit and crude oil prices strength, healthy macro developments and the resumption of foreign buying supports, sentiment on the local bourse could still stay positive to test immediate 1880-1890 in the mid to long term, despite expecting interim consolidations.

• Trading idea: Engtex is a good defensive play due to its earning resilience (FY17-19 earnings CAGR of 16%) in wake of external volatility, riding on the mega water infrastructure projects as well as nationwide pipe replacement projects. Valuation is cheap at 7.8x FY18 P/E with dividend on the rise ~3.7-4.6% for FY18E-19E from 1.2% in FY17E.

Source: Hong Leong Investment Bank Research - 2 Feb 2018