MARKET REVIEW

Asia’s stock markets trended mixed following Chinese Premier Li Keqiang’s statement at the opening of China’s National People’s Congress, commenting that China may need to prepare for a “tough struggle” as the trade tensions between US and China could impact China’s business activities negatively. The Nikkei 225 fell 0.44% and Shanghai Composite Index added 0.88%, while Hang Seng Index traded flat.

Meanwhile, the FBM KLCI traded lower by 0.49% to 1,685.62 pts, tracking the negative sentiment from Wall Street. Market breadth was negative with decliners leading advancers by a ratio of 4-to-3. Market traded volumes stood at 2.58bn, worth RM2.11bn. Nevertheless, poultry-related (MFLOUR, CCK and LAYHONG) and selected O&G (VELESTO, UZMA and COASTAL) stocks traded higher.

Wall Street slipped marginally as China forecasted lower growth rate (from 6.5% to 6% in 2019) this year. Also, the lack of details on the trade front has triggered concerns and continues to limit the upside potential on the stock markets. The Dow and S&P500 slid 0.05% and 0.11%, respectively.

TECHNICAL OUTLOOK: KLCI

The FBM KLCI ended lower for the sixth consecutive days and the MACD indicator expanded negatively over the past few sessions. The RSI and Stochastic oscillators are trending lower. Most of the indicators are suggesting that the key index may need to consolidate further before any positive rebound could emerge. The resistance will be located around 1,700, while support will be at 1,682, followed by 1,666.

On the local front, we expect the FBM KLCI to further consolidate over the near term without any fresh catalysts, coupled with the uninspiring 4Q financial results. In the meantime, we would advocate a defensive approach on companies with low gearing or net cash position in order to sail through a potential slowdown of economic activities in the upcoming quarters.

TECHNICAL OUTLOOK: DOW JONES

The Dow closed in the negative territory for the second straight day and violated the 10D SMA, indicating that the key index may trend negative bias over the near term. Also, MACD indicator and the momentum oscillators (RSI and Stochastic) oscillators have been falling for the past few sessions. With the negative technical readings, we believe the Dow could further consolidate and may retest the support near 25,000-25,117 (SMA200). Resistance will be pegged around 26,000.

In the US, we believe investors are looking forward to the trade details and a trade agreement between President Trump and President Xi by end of March. Should there be any negative surprises on the tariffs rollback, Wall Street may retrace further on the already-overbought Dow and S&P500 indices.

TECHNICAL TRACKER: PHARMANIAGA

Values re-emerge after sliding 43% since GE14. We believe the 43% meltdown in share prices has grossly priced in the worries of the non-renewal of concession agreements (end in Nov 2019) with MoH. Overall, we remain positive on PHARMA due to their (i) expertise in L&D, (ii) the margins from the concession business are not attractive (c.1%-2%) to attract other distributors or competitors, (iii) it is highly unlikely that with the current financial position of the government they would undertake the necessary investments to return the drug distribution function back into public hands, (iv) increasing contribution from Indonesia due to its huge population over 270m and (vi) attractive risk-reward profile at 10x FY19E P/E and 1.2x P/B, which are 36.7% and 41.1% lower compared to its peers (33% from 5Y average P/E of 15x), supported by a resilient FY18-20E EPS CAGR of 7% and attractive FY19-20 DYs of 8.6-9.4%.

Source: Hong Leong Investment Bank Research - 6 Mar 2019