After a good 3-week run, we expect the local market to experience a mild pullback this week but to trend higher after the breather. The bullish longer term view is underpinned by continued foreign fund inflow and ample domestic liquidity providing sustained support to the market. With the technical downside support of 1,850 to 1,838 levels, the re-emergence of bargain hunting activities would lead the market to retest the 1,882 levels. Last week, all our three model portfolios underperformed the FBMKLCI by 24-83bsp WoW, mainly due to TENAGA which faced heavy selling pressure on a foreign broker’s downgrade. On YTD basis, THEMATIC (+435bsp) and GROWTH portfolios (+262bsp) outpaced the benchmark index, but DIVIDEND YIELD underperformed the market by 98bsp.

A mild pullback before trending higher. We expect the FBMKLCI to experience a mild pullback this week before trending higher as the benchmark index had climbed 2.85% or 51.49-points since 14 March. More crucially, the index key technical indicators, i.e., RSI and Stochastic, have started or approaching overbought zones, which suggested that a mild pullback is imminent. Having said that, we believe the barometer index is still in an uptrend bias over the mid-term, underpinned by continued foreign fund inflow and ample domestic liquidity. Technically speaking, the index downside support is pegged at 1,850 to 1,838 levels, where we expect bargain hunting activities to re-emerge should these levels are breached. Meanwhile, the immediate resistance level for the FBMKLCI is at 1,882, followed by the 1,900 level.

A flattish week as expected. After a considerably good run since mid-March, the local market saw a fairly flattish performance last week with only 5.88pts or 0.32% weekly gain as the FBMKLCI settled at 1,856.61 last Friday. Banking stocks were the main market movers, especially after PBBANK (+8.55% WoW) announced that its shareholders have approved to merge its local shares and foreign shares into a single stock code. Other banking stocks like CIMB gained 3.48% over the week while MAYBANK inched up 1.03% from last week. However, TENAGA (-5.34%) was the biggest loser after a foreign broker downgraded the stock to Underweight from Overweight. On Wall Street, the US stocks gained last week on positive feedback from Fed Chairlady Janet Yellen as she reinforced the need for continued monetary support, and encouraging economic data also spurred better market sentiments.

All portfolios underperformed. While our portfolios have no exposure to larger banks, which were the main gainers last week, our invested heavyweight stock TENAGA faced selling pressure and sent our model portfolios southbound that underperformed the barometer index on the weekly basis. In fact, only GROWTH Portfolio posted weekly gain of 0.07%, thanks largely to REDTONE-WA (+6.06%) vs. total returns of 0.31% for FBMKLCI, while DIVIDEND YIELD and THEMATIC lost 0.52% and 0.16% of their fund value respectively. However, on YTD comparison, THEMATIC (+6.13%) and GROWTH Portfolios (+4.40%) still registered good returns as opposed to 1.78% total returns of the 30-stock index. Nonetheless, DIVIDEND YIELD Portfolio still lagged behind the market with only 0.80% YTD total returns.

... TENAGA the main culprit. While the alpha stock – REDTONE-WA made impressive returns of 7.14% to our invested value in THEMATIC and GROWTH Portfolios, the heavy selling in TENAGA resulted these two portfolios to contract by 5.82% over the week. Although the selling was severe in the last two trading days of the week, we believe that the sell down was overdone. Given its weighting in the FBMKLCI and clearer earnings visibility, TENAGA’s current valuation of CY14 PER of close to 14x is unwarranted. In our view, the integrated utility should at least trade at par with the market if not higher. Our target price for TENAGA which is our TOP PICK for 2Q14 Strategy is RM12.33/share.

Source: Kenanga