Profit-taking activities are expected to emerge following the strong rally in the FBMKLCI last week. Indeed, the benchmark index has ventured into our ‘Sell on Strength’ range, thus triggering our strategy of selling into a market rally. Technically speaking, we expect the FBMKLCI to trade at between 1,670 and 1,730 this week. Selective buying with a rangebound trading strategy remains our preferred strategy in 4Q15. We have added 10k LUXCHEM shares each into our GROWTH and DIVIDEND YIELD portfolios last week. Portfolio-performance-wise, all our model portfolios recorded positive weekly return last week but were below the street performance. Nevertheless, they still outpaced the benchmark index by 477-2,516bps on YTD basis.

Time to take a break. We expect profit taking activities to kick-in this week following the strong performance in the market which had entered into our Sell on Strength range. To recap, we have issued our 4Q15 strategy report last Monday, where we expected the barometer index to be trapped in a wide trading range with selective buying. Hence, a range-bound trading-oriented strategy remains as our preferred trading strategy. Our preferred “Buy on Weakness (B.O.W.) range is pegged at 1,570/1,610 while “Sell on Strength” (S.O.S.) range is targeted at 1,680/1,720 levels. While both the external and internal challenges (i.e. lack of immediate domestic re-rating catalysts, draining domestic liquidity, concerns over slowing China’s economy) remain largely unchanged, the domestic investment sentiment has gradually improved (based on our PER multiple discount between FBMSC and FBMKLCI studies). Coupled with the revival of ValueCap and a potential market-friendly Budget 2016, the FBMKLCI could have seen a bottom when it tested 1,503.68, at least for the short-term. Strategy-wise, we continued to favour: (i) big caps & GLCs, (ii) selective theme plays (i.e. export-oriented (benefit from the weak MYR), plantation (for rebound play)), (iii) resilient sectors (i.e. consumer & telco), and (iv) bashed-down stocks (i.e. at the 52-week low level). On top of that, we also believe the high dividend yield stocks (as outlined overleaf) could also draw risk-averse investors’ interest under the current uncertainties.

The return of the BULL. The FBMKLCI managed to skyrocket 77.74 points (or 4.77% WoW) to close at 1,706.54 with strong trading volume last week, underpinned by stronger performance in CIMB, AXIATA, and SIME. The bullishness was mainly boosted by external and currency factors where Ringgit recorded its best gain since 1998 (surging 3.7% last Wednesday or 6.5 % WoW to close at RM4.1295/USD) following a jump in oil prices as well as higher-than-expected trade surplus. Oil traders, meanwhile, were generally encouraged by expectations that the world’s two largest oil-exporting countries, Russia and Saudi Arabia may take measures to ease the supply gut, thus offsetting some concerns that China’s slowdown could lead to overcapacity in many industries. On Wall Street, stocks continued to cheer most of the time last week, thanks to better oil prices and dovish Fed minutes. Minutes from the Fed’s September 16-17 meeting emphasized policy maker‘s concerns about the slowing global economy, led by China, and the drag of the stronger dollar on the US thus, lifted confidence that the central bank would not move quickly to hike interest rates.

Added LUXCHEM into the portfolios. We have added 10,000 shares LUXCHEM into our GROWTH and DIVIDEND YIELD Portfolios each at last Wednesday’ closing price of RM1.54/share. We believe LUXCHEM is a small cap worth adding into your investment portfolio given its resilient earnings, above-average dividend yield of 4%-5% and net cash position. Our fair value of RM1.85/share is based on 12.5x FY16E PER which is in line with the small cap index average. Positive returns but not enough. All our model portfolios recorded positive weekly returns at the 2.0%-3.4% range but were below the market. The lower performance was not a surprise given we had kept more than 50%of our funds in cash in all our model portfolios. The DIVIDEND portfolio was the best performer among the three with fund value higher by 3.4% WoW, extended its YTD gain to 4.64%, followed by the GROWTH (2.89% WoW, 25.02% YTD) and THEMATIC (2.03% WoW, 15.36% YTD).

Source: Kenanga Research - 12 Oct 2015