MARKET REVIEW

Despite the trade tensions that have been developing over the past weeks, market digested it with a calmer tone and buying support continue to emerge and lifted most of the key regional benchmark indices higher. Also, the declining move in Chinese yuan was another positive factor for the rally in China markets. The Shanghai Composite Index and Hang Seng Index rallied 1.62% and 1.44%, respectively, while Nikkei 225 rose 0.51%.

In tandem with the regional performances, the FBM KLCI was traded firmer throughout the day and closed higher at 1,762.93 pts (+0.28%). Market breadth was positive with advancers leading decliners by a ratio of nearly 5-to-3, while market volumes increased to 3.35bn, vs 3.13bn on Monday. Again, we noticed most of the construction and technology stocks were actively traded amid potential review or revival of selected mega construction projects and weaker ringgit trend, respectively.

US equities ended on a positive note led by financials, coupled with better-than-expected results from Alphabet and United Technologies. However, most of the indexes traded off their respective intraday highs after Trump’s administration plans to offer USD12bn in aid to farmers hit by tariffs on their goods. The Dow and S&P500 gained 0.79% and 0.48%, respectively, while Nasdaq traded flat.

TECHNICAL OUTLOOK: KLCI

The FBM KLCI ended above the 1,760 level, forming a flag pattern breakout. The MACD Line continues to stay above zero, but both the RSI and Stochastic oscillators are overbought. Hence, based on the mixed signals on the indicators, we believe upside could be limited near the 1,790-1,800 levels. Support will be anchored around 1,730-1,740.

While we think market is still on a short term uptrend condition, upside could be limited as we opine that the recent rally is overheated and could poise for a mild retracement over the near term. Also, investors would take a cautious approach in view of a potentially softer August reporting season as well as the ongoing trade concerns.

TECHNICAL OUTLOOK: DOW JONES

The Dow managed to rebound above the upper band of the symmetrical triangle formation, resulting in a flag formation breakout. As the MACD Indicator is trending above zero, we believe the Dow could retest the immediate resistance of 25,500. Meanwhile, support will be pegged around 25,000, followed by 24,500.

In the US, traders will be monitoring the 2Q GDP that will be releasing this week, as well as earnings from selected companies such as Boeing, which may give market some insights on how companies with overseas business will be affected by President Trump’s tariffs measure. Also, the near term volatility is likely to be driven by the ongoing reporting season as well as news flows related to the trade disputes between the US and China.

TECHNICAL TRACKER: SALUTICA

Look beyond the washout FY6/18 and brace for a strong FY18-20 EPS CAGR of 31%; Bullish downtrend breakout. Despite potential earnings hiccup in 4QFY6/18 (mainly due to higher R&D and new platform expenses for new products), we believe the 61% plunge in share price is overdone, supported by undemanding 12.6x FY19 P/E (30% below historical P/E of 18x since listed and 10% discount to its peers), a strong FY18-20 EPS CAGR of 31% and attractive 5.9-6.6% FY19-20 dividend yields. Downside risk is cushioned by recent USD strength (vs RM), company’s share buy-back mandate and solid net cash ~RM74m or 19sen/share (after deducting the balance of RM14m capex from IPO proceeds).

Source: Hong Leong Investment Bank Research - 25 Jul 2018