While we are cautiously optimistic about the local market even after the just concluded US PE, we see a likely higher volatility in the local market. In such volatile market conditions, we reckon that the consistent performers, low'beta and defensive counters will continue to be the mainstream investment choices although we did see some profit'taking activities among Telco stocks under these categories. A Buy'On'Weakness approach is our preferred investment strategy (preferably below 1,610) as 4Q & 1Q are seasonally strong quarters for the local market. We also continue to have faith in our Top 5 picks for the quarter namely MAYBANK (OP, TP: RM10.40), SKPETRO (OP, TP: RM3.42), TM (OP, RM6.45), UOADEV (OP, TP: RM2.30) and WCT (OP, TP: RM3.17). Within these top picks, we are most hopeful that MAYBANK and SKPETRO will outperform, as the upside of FBMKLCI is heavily reliant on (i) Oil & Gas and (ii) Banking as per our earnings universe. As for trading ideas, we continue to believe that MEDIA (MP, TP: RM2.34) could act as a proxy to ASTRO (Not Rated) should the latter be included into FBMKLCI.  

US is historical weaker post its PE, but Malaysia had been doing the opposite. Historically speaking, even without the concern over 'Fiscal Cliff', DJIA traditionally performs weaker in the year after a PE. Statistics showed that DJIA only recorded 3.8%, on average in the following year after a PE, which is slightly worse than its average performance in PE years of 4.8%. While we do not rule out an initial negative knee'jerk impact to the local equity market, the weak performance of the DJIA after the US PE may not necessarily translate into a similar scenario in Malaysia in the longer term. Our findings suggest that FBMKLCI has been recording a stronger average gain of 7.5% after U.S. PE years as compared to 3.1% in the years before that. 

Highly probable but downside risk remains. This is not entirely impossible should developed economies' capital flow into this region, including Malaysia, as an alternative investment destination for better returns. This has been witnessed from the Net Buying Position of foreign investors on Bursa Securities' listed stocks. That said, should investors' concern build up over a possible more negative outcome from the fiscal cliff issue heading into the year'end, this could also result in more risk'adverse trading conditions, which may increase the safe haven demand for the dollar and potentially see a reversal in the incoming capital flow.

Revisions in earnings estimate and Index Target. Post the issuance of our 4Q12 Investment Strategy Report on 2 October 2012, we have revised some of our sector calls, earnings and target prices for stocks within our Earnings Universe. Our latest sector calls are summarised below: OVERWEIGHT: (i) Banking, (ii) Non'Bank Financials, (iii) Gaming, (iv) Oil & Gas, and (v) Power sectors. NEUTRAL: (i) Automobiles & Parts, (ii) Building Material, (iii) Consumer F&B, (iv) Consumer Retail, (v) Construction, (vi) Media, (vii) Plantations, (viii) Property & REITs, (ix) Glove, (x) Technology, (xi) Aviation, Transportations & Logistics as well as (xii) Water Utilities.

As a result, we have also fine'tuned our 12'month index target to 1,750 (18.1x & 16.1x to FY12 & FY13 earnings estimates) from 1,745. As for our end'2012 index target, it has also revised up 10 index points to 1,670 (17.3x & 15.4x to FY12 & FY13 earnings estimates) from 1,660. Our FY13 net earnings growth has also been upgraded marginally from 10.3% to 11.1%. However, we have cut our Y12 net earnings growth substantially from 36.3% to 5.8%, mainly skewed by Tenaga Nasional ('TENAGA', OP, TP: RM7.90).

Source: Kenanga