While we see the index staging a short-term pullback, the downside is likely to be well supported in view of the excess liquidity in the market. As such, we are downplaying our “Sell on Strength” strategy and believe that investors should adopt a “Buy on Weakness” strategy if the index stages a correction towards the 1,650-level. We prefer more exposure to the higher beta sectors/stocks as well as laggards such as AMBANK (OP; TP: RM7.40), DIGI (OP; TP: RM5.60), TM (OP; TP: RM6.45), MPHB (OP; TP: RM4.31), SKPETRO (OP; TP: RM4.15), MRCB (OP; TP: RM2.08), IJMLAND (OP; TP: RM2.93), DRB (MP; TP: RM2.70) and KLK (tentatively upgraded to a MP with a TP of RM21.86). We also like clear-cut winners such as TENAGA (OP; TP: RM8.56).
BN remains the ruling party. The long-awaited 13 General Election (“GE”) has finally concluded. The incumbent ruling party, Barisan Nasional (“BN”) has successfully been returned to power albeit with lesser parliament seats with 133 in contrast to 140 seats in the previous GE. In terms of state seats, BN regains control of Kedah while it retained both Perak and Terengganu with slim majorities.
Largely discounted by market? We believe this outcome could have been well discounted by the local equity market. As such, we do not expect any major sell-downs to occur. In fact, due to the strong liquidity, we believe the downside could be well-supported above 1,650, which is at a 6% discount to the consensus index target of 1,755 (see Figure 1). Recall that our strongest argument for our high confidence in the local equity market is the liquidity factor (see our 2Q13 Investment Strategy dated 27/03/2013 for details). For instance:
i. The local banking system is flush with approximately RM310b of excess liquidity (total deposits less total loans). To put this in perspective, this amount of excess liquidity will be able to absorb almost all the free floats of the local equity market (assuming a 25% public free float and a total market cap of approximately RM1,400b).
ii. The Money Market has also been seeing >RM10b in excess liquidity daily.
iii. Despite uncertainties over the GE, foreign investors have been the main net buyers as per Bursa Trade Statistics. For the YTD, we still saw a net foreign inflow of RM14.3b into the local equity market. This observation is further strengthened by the uptrend in the average foreign shareholding levels in FBMKLCI component stocks.
iv. The high foreign holdings in MGS also support the above arguments.
Turning more aggressive? Given that there are ample capital to be deployed back to the equity market and with the local market having been suppressed due to the GE uncertainty, coupled with its still lagging performance against the regional peers, we do not rule out the local equity market to potentially stage a catch-up play (see Figure 2 for details). As such, under this gigantic short-squeeze scenario, we prefer more exposure to the higher beta (vs. all-weather and defensive) sectors for now. These sectors include (i) Auto, (ii) Banking, (iii) Non-bank Financials, (iv) Construction, (v) Gaming, (vi) Oil & Gas sectors as well as (vii) Property (see Figure 3 for details).
Ideally, we are looking for price corrections, say towards 1,650. However, should the local market be resilient, latecomers could probably consider laggards that have under-performed the FBMKLCI thus far. We believe these stocks should carry lower downside risks but at the same time provide catch-up opportunities (see Figure 5 for details).
Higher index target? Apart from adopting a more aggressive investment strategy, we are also looking to revise up our index target especially given that we are in the midst of rolling over our valuation base year for our stock coverage to CY2014. To recap, 2014 will be a better year in terms of earnings growth. We estimate the FBMKLCI’s core earnings to rebound to 9.6% from 4.4% in 2013 (Note that this is a tentative revised figure and our previous estimate was 3.1%). Tentatively, we are pegging our 12-month index target at 1,830, representing 16.4x FY14 PER. This PER target is also close to a +1 standard deviation level above the 6-year average Forward PER Band. Using this 12-month index target as a benchmark, our year-end index target is projected at 1,770 as compared to 1,705 previously. At 1,770, the index will be trading at 15.9x FY14 PER, which is almost in line with the average of its 6-year Historical PER Band.
Source: Kenanga
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