Selective stock picking and range trading strategy is our preferred investment strategy in the near-term in view of higher volatility ahead post China’s yuan devaluation and rising US interest rate environment, which could continue to shake markets for months to come. We expect the key index to be trapped in a sideways range-bound trading mode in 1Q16 with a “Buy On Weakness” zone set at below 1,620 and “Sell On Strength” as it approaches 1,710 and beyond. Moving forward, our On Our Radar’s mid-and-small cap stocks recommendations are likely focus on undervalued thematic plays and/or exportoriented counters due to the strengthening USD. Meanwhile, our OR tracker portfolio’s 5.1% MoM returns in December outperformed the FBMKLCI which only bagged a total return of 1.5%.

A season greeting month. We merely issued two On Our Radar (OR) reports during the eventful month in December, which include company updates on TEXCYCL (Note Rated, FV: RM0.96-RM1.49 range) and SKP Resources (OP, TP: RM1.76). On TEXCYCL; while we have a NOT RATED call for now, we do not discount that the stock could be worth holding for long-term investment given its cheap valuation and capacity expansion plan. SKP Resources, meanwhile, remains our favourite counter under our OR tracker list. In view of its notable financial track record coupled with a series of positive corporate developments, we have decided to move the stock to our core coverage list in mid-December.

Fed ends an era of cheap dollar. The global equity market performed relatively stable in December despite the first interest rate hike by US Fed (in close to a decade) which also pledged a gradual pace of increases. The Financial Times’ poll from 51 US top economists suggests that the Fed is likely to lift rates by 75 bps in 2016 and a further 100 bps in 2017. Despite further rate hikes ahead, the latest decision made by US Fed has clearly removed one of the biggest external uncertainties from the market. Besides, the typical year-end window dressing activities have also led the FBMKLCI to soar by 29.0 points (or 1.7%) over the last two-week of December and closed at 1,692.51 points in the last trading day of 2015 as well as bringing the total return to -3.4% for that year.

OR tracker portfolio continued to outpace the market. Following the transfer of SKP Resources to the core coverage list last month, our OR tracker list has been reduced to 31 for now. Together with 68 stocks in the realised portfolio, the average total returns for the tracker stocks and realised portfolio since inception (13-Aug-2012) is 30.2%, which clearly outpaced the FBMKLCI’s total return of 11.1% for the same period. For the month of December, OR tracker portfolio registered a handsome 5.1% gain vs. the FBMKLCI’s total returns of 1.5%. Top performers were KTC with an extraordinary 52.7% gain in December, followed by PELIKAN and SUCCESS, at 23.8% and 19.9%, respectively. On the risk and reward ratio front, our OR tracker portfolio recorded a decent ratio of 1:2 in December.

Moving into a volatile trading season. The relatively positive sentiment in December was completely eroded during the first week of 2016 after China suspended its stock market when it fell more than 7% for the second time in a week. The turmoil in China coupled with lower oil prices, and yuan devaluation caused investors’ sentiment turning more cautious mode as well as triggering a sell-off in Asian and Western stocks and dampened the FBMKLCI performance to -2.95% YTD. A series of aftershocks post China’s yuan devaluation and rising US interest rate trend could continue to shake markets for months to come, in our view.

Source: Kenanga Research - 14 Jan 2016