We expect knee-jerk effects arising from the 25 bps hike in OPR by Bank Negara Malaysia to linger in the local market this week. The FBMKLCI is expected to test the immediate key support level at 1,876 which if fail to sustain could see the 30-stock index beating a retreat to the 1,861 level. Despite the somewhat overcast mood following the interest rate hike, ample liquidity in the financial system coupled with potential higher foreign inflow could provide some cushions to the local equity market. Buy On Weakness is still our preferred strategy with an ideal entry level at 1,835 and below. Performancewise, all our three model portfolios return continued to surge and outperformed the FBMKLCI by 86-187bps WoW and 884-1,871bps on YTD basis with GROWTH Portfolio being the top performer.

Knee-jerk effects to continue. The local market is expected to continue to face some hiccups this week following the 25 bps hike in overnight policy rate (to 3.25%) – the first-rate hike since May 2011, by Bank Negara Malaysia (BNM) last Thursday. We believe the knee-jerk effects as well as cautious trading sentiment will likely to continue this week and expect the FBMKLCI to test the immediate key support level at 1,876. Should the 30-stock index fail to hold that level, it could potentially fall to 1,861 before buying interest re-emerges. Having said that, we believe the ample of liquidity in the financial system coupled with a potential higher foreign inflow as a result of the continued strengthening in Ringgit could provide some cushions to the local equity market. We continue to prefer to adopt a Buy On Weakness (B.O.W.) strategy with an ideal entry level at 1,835 and below.

Immaterial earning's impact for now. The move by BNM last Thursday to hike the OPR rate by 25 bps is not expected to exert any huge earning impact on the interest rate and Ringgit sensitive sectors (i.e. Banking, E&E, Gloves, MREIT, Property and Shipping) due to the relatively low quantum of increase. While we do not discount the probability of BNM implementing another rate hike in coming months, the likelihood of this happening is relatively low for now as the adverse impact on consumption spending will net off the positive gain in dealing with financial imbalances. Should there are any subsequent rate hikes, it will likely crimp domestic demand moving forward. Although the recent rate hike came in within the street consensus, the local market reacted negatively to the latest BNM’s decision which led the FBMKLCI to decline 9.47 points (or -0.5%) last Friday and closed at the week-low at 1,883.15 (-0.1% WoW). The top three index laggards last week were CIMB (-2.4% WoW), PETD (-10.2% WoW), and PTG (-2.7% WoW) while the movers came from MAYBANK (1.7% WoW), IHH (5.6% WoW) and PUBLIC BANK (0.9% WoW).

Corporate earnings are the next test for Wall Street. On the US front, DOW and S&P 500 ended lower by 0.01% WoW each, after re-writing the record book a week ago. To warrant another big move, Wall Street is needed to see U.S. corporates delivering material growth in profit and revenue in the coming earnings season. Analysts polled by Thomson Reuters expect S&P 500 earnings to grow 6.2% in the 2Q, down from 9.7% on Jan. 1, but up from 5.6% in the 1Q. Aluminum maker Alcoa is expected to kick off the earning's reporting season on Tuesday after the market close.

All portfolios recorded positive return last week which saw the GROWTH portfolio’s total returns improved by 1.8% WoW (vs. -0.1% WoW in the FBMKLCI) followed by THEMATIC (+1.4% WoW) and DIVIDEND YIELD (+0.8% WoW). All our stock selections recorded gains last week; REDTONE-WA (+3.1% WoW), PESTECH (+1.9% WoW) and MAGNI (+1.6% WoW) were the key movers while BJTOTO recorded flat performance (-0.01% WoW). YTD, the GROWTH portfolio continued to take the lead and registered +22.9% return (vs. +4.2% in the FBMKLCI), followed by THEMATIC (+21.1%) and DIVIDEND YIELD (+13.0%).

Source: Kenanga