MARKET REVIEW

Global: Despite rallies on Japan Nikkei 225 and China SHCOMP amid positive PMI manufacturing data, Asian markets ended mixed following a resurgence in Covid -19 cases in the region will curb global recovery hopes as authorities take drastic measures to halt surging virus cases.

Overnight, the Dow rebounded 236 pts to 26664 as investors took heart in upbeat manufacturing data and efforts to hammer out a coronavirus relief bill resumed coupled with better-than-expected earnings season as over 80% of the S&P 500 companies that had released results beat the lowered bar earnings expectations. Market sentiment was also boosted by Microsoft’s proposed acquisition to buy the US operations of TikTok, which is owned by the Chinese company Byte Dance following Trump’s threat that TikTok will have to close its U.S. operations by Sept. 15 as it is seen as a source of national security and censorship concerns.

Malaysia. KLCI plunged 31.1 pts (the biggest one-day fall in 7 weeks) to 1572.6 amid ongoing political uncertainty following the dissolution of the state assembly in Sabah and expectations of worsening reported numbers for 2Q20 (both GDP and corporate results). Sentiment was also dampened by selling pressures on banking shares due to concerns over deteriorating assets quality and margins squeeze following the targeted moratorium extension for another three months until end Dec 2020 and a potential OPR cut in the September MPC meeting. Trading volume surged to another record high of 13.1bn shares valued at RM8.2bn against last Thursday’s 11.92bn shares worth RM6.16bn. Market breadth was negative with 505 gainers vs 707 losers.

Yesterday, foreigners remained the net sellers (-RM174m) whilst local institutional funds and retailers were the net buyers with RM92m and RM82m, respectively. YTD, foreigners sold ~RM19bn shares compared with purchases by local institutional funds (RM10.4bn) and retailers (RM8.6bn).

TECHNICAL OUTLOOK: KLCI

Weighing both directions, KLCI is likely to exhibit more downside than upside following a sharp fall below 1591 yesterday in wake of ongoing domestic political uncertainty and August reporting season, a resurgence of Covid-19 cases and intensified US-China geopolitical tension. We expect KLCI to retest lower key support near 1563 (17 July low) before staging a technical rebound. Breaking 1563 levels would trigger a renewed selloff towards stronger floors at 1541 (50d SMA) and 1511 (200D SMA) zones. On the contrary, only a successful reclaim above 1591 and 1600 hurdles would open the door for higher targets at 1618, 1633 (61.8% FR from 1896 and 1208) and 1644 (weekly upper BB) zones.

MARKET OUTLOOK

As the impact of past stimulus measures fading and given some evidence that the global recovery has already stalled amid a 2nd wave Covid-19 infections fear coupled with intensifying US-China geopolitical conflict, it remains to be seen what will help to keep global stock markets elevated in the coming weeks. On the domestic scene, lingering political uncertaitny and expectations of worsening reported numbers for 2Q20 (both GDP and corporate results) are the risks that could trigger further consolidation in August. Technically, weighing both directions, KLCI is likely to exhibit more downside pressure than upside following a sharp fall below 1591 (9 June high) yesterday. We expect KLCI to retest lower key support near 1563 (17 July low) before staging a technical rebound. Key resistances are situated at 1591, 1600 and 1618 (29 July high) territory.

On stock selection, HLIB Research maintains a Buy rating on Homeritz (RM0.72 TP, 8.7x FY20 P/E, 5.1% DY FY20, netcash per share RM0.26) as the company is expected to recover strongly in 4Q20 from the recent 3QFY20 trough results, in anticipation of further trade diversions from China and stable raw materials supplies. Technically, the stock is likely to form a base near RM0.56-0.57 before staging a downtrend rversal towards RM0.62-0.64-0.675 zones. Cut loss at RM0.53.

Source: Hong Leong Investment Bank Research - 4 Aug 2020