We believe the revival of ValueCap is a positive measure to the local equity market as it could serve as a rerating catalyst by improving market sentiment judging from the strong performance of FBMKLCI back in 2003 when ValueCap was first formed and commenced operations. The “discount” between FBMKLCI and its consensus target has reversed to 7.4%, which comfortably stayed above its -2SD-level of its 3- year moving average (of 7.9%). We believe the additional liquidity to be injected should be able to cushion the rampant foreign outflows that we have seen so far. Hence, our earlier expectation that a (temporary) bottom could have been formed at 1,503.68 is further reinforced. Nonetheless, we maintain our 12-month index target objective of 1,680, implying 2.5% upside from here. Coupled with the volatility and uncertainties from both domestic and external fronts, we believe investors should adopt a Sell On Strength (S.O.S.) strategy if and when the index approaches the resistance zone of 1,660-1,700. This S.O.S. zone is based on 6.1% (-1SD) and 4.2% (3-year mean) discount to FBMKLCI’s consensus target of 1,770.

The revival of ValueCap. Yesterday, our Prime Minister, Dato' Sri Najib Razak announced some measures to strengthen the domestic economy and market. One of the measures that excite the local equity market could be the revival of ValueCap. To recap, the federal government has brought back the just-phased out equity fund, ValueCap, to boost underperforming shares and stabilise the financial market. For this purpose, it was announced that RM20b will be injected into this equity fund.

Old but not obsolete. This is not a new measure. Recall back in 2002, ValueCap was created to support the chaotic market and it had proven to be effective in stabilising the equity market. With the initial capital injection of RM5.1b and operations commencing in Jan 2013, we saw the local equity market reversing its downtrend in 2002. FBMKLCI rose ~30% in 2003 (see Figure 1) in contrast to ~25% decline since April 2002. While the strong performance of FBMKLCI in 2003 could be partly due to the strong performance by favourable global market (when Dow Jones Industrial Average gained >20% in 2003), we cannot deny the role of such measure in improving investors’ confidence and serving as a market/rerating catalyst. This was somewhat reflected in FBMKLCI’s yesterday performance. FBMKLCI rose 2.2% to 1,639.63. As such, the “discount” between FBMKLCI and its consensus target, has reversed to 7.4%, which comfortably stayed above its -2SD-level of its 3-year moving average (of 7.9%). Recall that the discount had dipped to “oversold” level and registered a multi-year low of 9.4% (see Figure 3).

Boosting domestic market liquidity. Assuming the allocated RM20b capital is “new” or “fresh” capital funded by Government Linked Funds such as including Permodalan Nasional Bhd, the Retirement Fund Incorporation (KWAP) and Khazanah Nasional Bhd; we believe the measure should be positive for the domestic equity market. To the very least, the fresh money could cushion the rampant foreign outflows that we have seen so far. As of 11 September 2015, we saw total foreign outflow of approximately RM17b from the local equity market (see Figure 4).

All told, with the revival of ValueCap, this has further reinforced our earlier expectation that a (temporary) bottom could have formed at 1,503.68 (representing a 14.5x Fwd. PER, which was way below the -2SD-level of 15.1x). At the same time, we maintain our 12-month index target objective of 1,680, as this target objective implies PERs of 19.3x and 17.3x over our FY15E and FY16E earnings estimates, respectively, which are already at the higher end of FBMKLCI’s historical PER Band. As the upside is getting limited, we only advise investors to nibble if and when price weakness emerges.

Taking Chips Off The Table? Coupled with the unfavourable volatility and uncertainties from both domestic and external fronts, we believe investors should adopt a Sell On Strength (S.O.S.) strategy if and when the index approaches the resistance zone of 1,660-1,700. This S.O.S. zone is based on 6.1% (-1SD) and 4.2% discount to FBMKLCI’s consensus target of 1,770. We are in the midst of finalising our 4Q2015 Investment Strategy and reviewing our 3Q15 Top Picks. To recap, in our 3Q15 Strategy, we highlighted our preference for ... · High-yielding stocks such as BJTOTO (OP, TP: RM3.72). · Stocks in resilient sectors such as Telco, Power, Healthcare, Education and Consumer F&B. Among these sectors, we choose TM (OP, TP: RM7.33), PESTECH (OP, TP: RM6.11), TOPGLVE (OP, TP: RM7.90) and SASBADI (TB, TP: RM2.68). We have recently upgraded KOSSAN's target price (OP, TP: RM8.16) and OLDTOWN's (OP, TP: RM1.65) rating. DIGI (OP, TP: RM6.10) is also our favourite among celcos. · Selective exporters such as MPI (OP, TP: RM7.45) and SLP (OP, TP: RM1.76) despite their superb performances at the expenses of the MYR (depreciation).

Source:Kenanga Research - 15 Sep 2015