MARKET REVIEW

Following the rate cut decision by the Fed overnight, key regional benchmark indices ended mostly lower as investors pricing in less aggressive stance by the Fed in slashing interest rate moving forward. In addition, private survey suggested that China’s Caixin/Markit factory PMI contracted in July, standing at 49.9 (slightly above consensus at 49.6) dampened the market sentiment. Shanghai Composite Index and Hang Seng Index fell 0.81% and 0.76%, respectively, but Nikkei 225 rose marginally by 0.09%.

After the FOMC meeting, where the Fed has reduced its interest rate by 25 basis points, the FBM KLCI gapped down after the opening bell, but managed to recoup its losses, bucking the regional trend to trade higher on the back of bargain hunting activities. Market breadth was still negative with decliners led advancers by a ratio of 7-to-5. Market traded volumes stood at 2.45bn, worth RM2.02bn.

Wall Street traded higher after the opening bell as traders speculated that the Fed may continue to reduce interest rates later this year following a soft manufacturing data (ISM index declined from 51.7 to 51.2 in July) which has deteriorated in July to an almost 3-year low. However, the market was caught by surprise as President Trump commented in a tweet that the US would impose additional 10% tariff on USD300bn worth of Chinese products and will be taking effect starting 1st of September; the Dow traded sharply lower by 1.05%, while S&P500 and Nasdaq lost 0.90% and 0.79%, respectively.

TECHNICAL OUTLOOK: KLCI

The FBM KLCI snapped a 3-day losing streak, forming a potential technical rebound amid the oversold signals flagged by the RSI and Stochastic oscillators. Despite the MACD Line is below zero, the Histogram has recovered marginally. Hence, we believe the key index could be due for a technical rebound in the near term, targeting the 1,650 level, with the support pegged around 1,610-1,630.

We expect the renewed trade tensions between the US and China will put pressure on the regional stock markets and the KLCI’s upside potential (resistance is set around 1,650) may be capped for the near term. Under this environment, we advocate traders to take some profits off the table and look out for opportunities within companies with strong balance sheet (net cash) and decent dividend yield.

TECHNICAL OUTLOOK: DOW JONES

The Dow continues to trade lower, rejecting the 27,000 psychological level after violating the level two trading days ago. The MACD indicator trended lower and both the RSI and Stochastic oscillators are suggesting that the momentum is weakening. Hence, the resistance will be set at 27,000, while the immediate support will be located around 26,500.

We expect the new developments (10% additional tariffs on USD300bn worth of Chinese products) on trade tensions may dampen the stock market sentiment over the near term. Hence, the Dow may continue to slide below the immediate support of 26,500 to 26,000. Investors will also be watching the reactions from Chinese officials on trade talks following the new tariff threat by President Trump, which will be sensitive towards the market direction.

CLOSED POSITION

We Took Profit on ARBB (6.3% Return) Yesterday After Hitting RM0.51 (R1).

TECHNICAL TRACKER: PECCA

Strong earnings visibility and solid balance sheet to cushion adversity. HLIB maintains a BUY rating with a RM1.40 TP (+21.7% upside) based on 13.3x P/E on FY20 EPS, given its strong operational cash flow of RM17-25m per annum (FY19-21) and net cash position of RM94.0m (51sen/share or 45% to share price). Valuation is undemanding at 10.9x FY20E (27% lower than average 15x P/E since listed, ex-cash, PECCA’s PE is more compelling at 6x), supported attractive DY of 5.2-7.0% for FY19-21. Overall, Pecca is expected to continue leveraging on major client Perodua sales growth (strong demand for Myvi and newly launched Aruz models). Management is also strategizing to increase export sales (revenue grew 11% in 9MFY19), which fetches higher margin. Technically, the positive Cup & Handle formation may signals a potential upside targets around RM1.24-1.42 zones.

Source: Hong Leong Investment Bank Research - 2 Aug 2019