While the recent sell-down of the market could have been overdone with a sharp rebound after the sovereign rating upgrade, our range-bound TRADING-oriented strategy remains unchanged. Apart from being more SELECTIVE in stock picking, the preferred “Buy on Weakness” (B.O.W.) level is <1,735 while “Sell on Strength” (S.O.S.) level is >1,810. We will, of course, be monitoring events closely in the coming months, and will advise investors if events warrant a shift in our market view and investment strategy.

Brief Review. Recall that in our previous Quarterly Strategy Report, we made a stand that the local equity market could be trapped in a wide range-bound mode of between 1,695 and 1,885 until we see more exciting catalysts. Keeping score, the gyrations of the FBMKLCI from the recent high of 1,867.5 to a low of 1,691.9 during the quarter was well within this anticipation. While some might criticise the wide-range conjecture, this is inevitable given the rising market volatility. However, against our earlier expectation, 2Q15 performance is one of the worst ever recorded in the past 10 years with a decline of ~7%.

Temporary Bottom? Despite inspired by the Malaysian Sovereign Rating upgrade, we do not rule out that a temporary bottom could have formed as the recent price corrections were steep in nature and the “Discount” between FBMKLCI to its consensus index target has widened to 7.5%, which is the -2SD-level below its trailing 3-year mean of 4%. Moreover, we gathered that the “Premium” of FBMKLCI valuation, as per consensus Fwd. PER, has also been narrowing against regional peers. Besides, we also believe the decline in average foreign shareholding of FBMKLCI could taper off. This is because the average foreign shareholding is still on an uptrend since early-2013 and the recent decline in the average foreign shareholding has been deviating from its regression trend significantly, which could suggest an “oversold” condition, at least in the short-term.

Nonetheless, downside risk remains intact. Owing to both domestic and external uncertainties, coupled with the negative technical picture and weaker investment sentiment as well as higher market volatility, persistent foreign outflow could be a concern despite the reasonably strong domestic liquidity. Besides, we also notice that the market dynamics are highly correlated to share financing as well. So far, FBMKLCI and its Fwd. PER have been declining in tandem with the lower percentage of Loan for Share Financing to Total Loan. Should this lending continue to decline, this will put pressure on the equity market.

Therefore, we have lowered our index target lower to 1,810 (from 1,845 earlier) on lower target FY16E PER (18.4x vs. 19.0x earlier) and minor earnings and target prices adjustment. This target is also backed by FY15E earnings growth of 2.5% and a stronger growth of 7.8% in FY16E.

Focused Sector & Stock Picks. We continue to like high-yielding stocks such as BJTOTO (OP, TP: RM3.72). Stocks in resilient sectors such as Telco, Healthcare, Education and Consumer F&B will also be our preferred choices. Among these sectors, we choose TM (OP, TP: RM7.80), TOPGLVE (OP, TP: RM7.90) and SASBADI (TB, TP: RM2.68) as our 3Q Top Picks. While the weakening trend of ringgit remains favourable to exporters, we are selective and prefer laggards. As such, we select TOPGLVE as our Top Pick from glove sector for the quarter. Nonetheless, we do see further upside for some exporters such as MPI (OP, TP: RM8.90) and SLP (OP, TP: RM1.76) despite their superb performances. Of course, we also continue to focus on our other Overweight sectors like Construction and Logistics. MITRA (OP, TP: RM2.35) and CENTURY (TB, TP: RM1.19) are the chosen ones from these sectors. Other Top Picks are ARMADA (OP, TP: RM1.55), BJAUTO (OP, TP: RM3.14), and PESTECH (OP, TP: RM6.11) despite our Neutral rating on Oil & Gas, Auto and Power Utility sectors. For short-term traders, it is worthwhile to consider bottom-fishing stocks, especially big caps, which are trading near their respective 52-week lows. We believe these heavily bashed down stocks could stage a quick rebound from their recent lows (Figure 30). 

Source: Kenanga Research - 2 Jul 2015