For 2Q13, we are adopting a similar strategy as 1Q13 as we still believe that the local equity market is still trapped in a range‐bound mode. Together with a highly uncertain investment environment, it is wise to continue to stay to the basic strategy of “Buy on Weakness” (“B.O.W.”) or “Sell on Strength” (“S.O.S.”). We believe <1,600 should be the B.O.W.zone and >1,695 should representthe S.O.S. area. We have revised our FBMKLCI’s FY13E core net profit growth ratesto 3.1% in contrastto 9.9% previously. Meanwhile, we are introducing our FY14F core earnings growth at 9.6%. Due to the better earnings prospectin FY14 (backed by decent 2013 and 2014 realGDP growth forecasts of 5.3% and 5.5% respectively), our end‐2013 FBMKLCI Target has been revised up slightly to 1,705 (Top‐Down: 1,660; Bottom‐Up: 1,750) from 1,700 previously. At 1,705, the FBMKLCI would be valued at 17.3x FY13E PER or 15.7x FY14F PER.

Mostly priced in? As at the time of writing, the parliament has yet to be dissolved for the 13th GE. The 2^nd quarter is going to be an interesting but tough quarter given that the GE will likely be held within the quarter. While there have been a lot of speculations with regard to the date of the dissolution of Parliament and GE, it is widely believed that these long‐awaited events should be completed by the end of the quarter. While we have no intention to predict the outcome, we believe the market could have priced in all possible outcomes. That said, the FBMKLCI will probably not see much of a downside unless major changes are seen. Still, we reckon that there is high likelihood for the FBMKLCI to retest the support zone of 1,605/1,595 after the announcement of the parliament dissolution. Of course, the ability to hold above this level thereafter will hinge on the GE outcome.

Liquidity comesto the rescue. The strong liquidity in the financial system should continue to support the downside risk in our view. Excess liquidity in the banking system remains strong at RM309b. To put this in perspective, this amount of excess liquidity would be able to absorb almost all the free float of the local equity market (assuming a 25% public free float and a total market cap of approximately RM1,300b). The daily excess liquidity in the money marketis also in excess of RM10b. Foreign investors are also still net buyers of equity and their holdings in government debt securities are also at a historical high.

Upside is capped, however. Nonetheless,the upside will likely be capped in the absent of any strong price catalysts. Thus far, we have yet to see any strong re‐rating catalysts. In fact, we saw more negative surprises of late. For instance, the consensus, including us, has cut the earnings growth estimate forthemarketfollowing the recent weaker‐than‐expected reported results.

For its floor valuation, we believe that the 6‐year average Forward PER of 15.0x should be sufficient to cushion any domestic and external hiccup impactsto the market. This valuation translates into an index level of ~1,560 based on the market’s FY13E core net earnings estimate. Stronger supports are seen at 1,475‐1,455.

Our sector ratings remain almost unchanged. Among the sectors, we have OVERWEIGHT calls on (i)Banking, (ii) Non‐Bank Financials, (iii) Consumer ‐ F&B, (iv) Oil & Gas, (v) Power Utility and (vi) Telco. Apart from maintaining an UNDERWEIGHT call on the Plantation sector, the othersectors under our coverage are rated as NEUTRAL. In the event of any strong price corrections post the GE, we advise investors to take the opportunity to accumulate stocks in all‐weather sectors such as (i) Education, (ii) Glove, (iii) Healthcare, (iv) REIT, (v) Telco (vi) Utilities and even (vii) Plantation if their valuations are “right” (see Figure 24 for floor valuations). We also see the high likelihood of us upgrading our NEUTRAL call on the Property sectoriftheGE is proven to be a non‐event.

Our 2Q13 Top 10 stocks picks are AMBANK (TP: RM7.40), KOSSAN (TP: RM3.64), MPHB (TP:RM4.31), P&O (TP: RM1.80), PPB (TP: RM15.00), SKPETRO (TP: RM3.82), TCHONG (TP: RM5.60), TENAGA (TP: RM8.05), TM (TP: RM6.25) andUEMLAND(TP: RM3.25).

Source: Kenanga