The FBMKLCI is expected to continue to trade sideways in a consolidation mode this week. Nevertheless, the FBM Small cap index is likely to continue cheering due to the renewed buying interest in the mid-to-small capitalisation counters as well as strong news flow in selective companies. Despite the lacklustre performance in the FBMKLCI last week, all our portfolios managed to beat the index and continued to outperform the market by 492-1570bps on a YTD basis. Although we believe the risk of short-term correction is high, any downside risk could potentially be cushioned by the strong and ample domestic liquidity. We continue to recommend investors to adopt B.O.W. strategy when the index is below 1,720 and S.O.S strategy when the index trades above the 1,810 level. 

A consolidation week. The FBMKLCI traded between 1,767.50 to 1,778.96 points range last week and closed at 1,772.27(-1.3% WoW) on the lack of fresh catalysts and news to cheer the blue chips. The FBM Small cap index however experienced a strong rally and closed at 15,107.78 (+5.6% WoW) last Friday. The rally was mainly led by renewed buying interest in the mid-to-small capitalisation counters as well as strong positive news flow in selective companies (i.e. PUNCAK and SCOMI). The key lagging movers (in the FBMKLCI) last week were GENT (where share price slid by -3.8%); SIME (-1.3%) and DIGI (-1.3%). Moving forward, we continue to expect the market to trade sideways within a consolidation mode this week, pending the next catalyst. Key local event to watch is the direction of the local overnight rate, to be announced by Bank Negara this Thursday’s evening. Consensus is expecting the rate to be maintained at 3.00%. Meanwhile, the US Federal Reserve will also release its recent FOMC meeting minutes on Thursday (US time) shedding some light on its monetary policy. 

Portfolios continue to perform.  Despite a weaker performance in the overall market, our three model portfolios managed to beat the FBMKLCI by more than 1% last week, of which the GROWTH portfolio advanced by +2.6% WoW followed by  the THEMATIC (+2.0%) and DIVIDEND YIELD (+1.1%). The WoW gains were mainly led by YEE LEE (where share price gained +8.2%); MAGNUM (+5.8%); and AMMB (+4.2%). On YTD basis, all our portfolios continued to outperform the market by 492-1570bps. The THEMATIC portfolio remained the top performer with a total return of +22.37% in contrast to the FBMKLCI of +6.67%. The GROWTH portfolio came in second with 18.87% in total gains followed by the DIVIDEND YIELD portfolio (+11.59%).

Adding REDTONE-WA into the portfolios. We have added 40k REDTONE-WA at RM0.405 each to our THEMATIC and GROWTH portfolios last week. We believe REDTONE is on track to achieve a record-high 4QFY13 results by the end of  July. Meanwhile, the recent teaming up with Johor’s Royal family on bidding for the digital terrestrial television broadcast (“DTTB”) infrastructure contract could provide some speculative support to the share price. The group’s warrant will expire on 4 March 2015 with a strike price of RM0.25/share. 

3Q13 investment strategy remained unchanged. While we believe that there is further upside for the FBMKLCI, judging from our 12-month index target of 1,850, we see risks of short-term corrections arising from (i) heightened  volatility; (ii) possible global and domestic monetary tightening; (iii) aggressive foreign outflow; and (iv) stretched valuations. Nevertheless, we are not overly concerned as we believe that (i) the solid domestic liquidity; (ii) laggard YTD performance in contrast to the regional markets; coupled with (iii) a lower political risk post-GE should cushion any downside risk, if any. As thus, we continue to recommend investors to adopt ‘Buy On Weakness’ (“B.O.W.”) strategy when the index is below 1,720 while considering a ‘Sell On Strength’ (“S.O.S.”) strategy should the index trades above 1,810. Sector-wise, we continue to favour the (i) building material & construction; (ii) Oil & Gas; and (iii) glove as well as selective stocks in property and plantation sectors. Telco sector will be the preferred choice for laggard play. Our top 10 blue-chip stock picks for the 3Q13 are AIRASIA (TP: RM3.51); ASIANBRN (TP: RM3.95); CRESBLD (TP: RM1.73); DIGI (TP: RM5.24); GAMUDA (TP: RM5.30); IJMPLNT (TP: RM3.60); KOSSAN (TP: RM6.20); MAGNUM (TP: RM4.37); SKPETRO (TP: RM4.72) and TENAGA (TP: RM8.56).

Source: Kenanga