While we believe that there is further upside for the FBMKLCI, we see risks of short-term corrections arising from the (i) heightened volatility, (ii) global and domestic monetary policies, (iii) aggressive foreign outflow and (iv) stretched valuations. Nonetheless, we are not overly concerned as we believe that (i) the solid domestic liquidity coupled with (ii) its lagging performance among the regional peers as well as (iii) the lower political uncertainty after the GE should cushion the index downside. Given our decent 12-month FBMKLCI Target  of 1,850, we prefer a B.O.W. investment strategy, preferably below 1,720.

Our 12-month FBMKLCI Target of 1,850  is derived from both the Bottom-Up (Index Target: 1,870) and Top-Down (Fair Value: 1,830) approaches on the back of a 10.1% FY14 earnings growth (vs. 2.7% in FY13). 

At 1,850, this implies FY13 and FY14 PERs of 19.1x and 17.2x respectively. Aggressive investors may, however, consider adopting a S.O.S. strategy should the index trade above 1,810, our year-end index target, purely from a rich valuation standpoint. 

Sector-wise, we like (i) Building Material & Construction, (ii) Oil & Gas and (iii) Glove sectors. At the same time, we are selective on the  (i) Property and (ii) Plantation sectors. We also like the Telco sector for its laggard nature. 

For aggressive investors, they may consider stocks  (i) that have been recently sold down heavily by the foreign inventors and (ii) mid-and small-cap stocks. 

3Q2013 Top Picks. On the back of the above investment merits, we select (i) AIRASIA (OP, TP: RM3.51), (ii) ASIABRN (OP, TP: RM3.95), (iii) CRESBLD (OP, TP: RM1.73), (iv) DIGI (OP, TP: RM5.24), (v) GAMUDA (OP, TP: RM5.30), (vi) IJMPLNT (OP, TP: RM3.60), (vii) KOSSAN (OP, TP: RM6.20), (viii) MPHB (OP, TP: RM4.37) / MUHIBAH (OP, TP: RM1.90), (xi) SKPETRO (OP, TP: RM4.72), (x) TENAGA (OP, TP: RM8.56) as our TOP 10 PICKS for the quarter.

Source: Kenanga