Still a range trading market. We view the current rally in equity markets as a reaction to the extreme oversold situation and increased risk appetite of global investors as volatility declines. Although the market sentiment could have improved on: (i) Fed likely to revise its U.S. interest rate in a less aggressive manner, (ii) stronger RM, crude palm oil and Brent crude prices, and (iii) improved domestic liquidity, a broad-based earnings growth story is still missing, and the rich market valuation remains a major deterrent. Thus, our Range-Trading view remains unchanged with B.O.W./S.O.S. set at 1,635/1,725 levels. As for preference in sector allocations, we still favour: (i) Construction, (ii) Power Utility, and (iii) Gloves sectors but UNDERWEIGHT: (i) Automotive, (ii) Healthcare (Hospital), and (iii) Property. We have selected: (i) CBIP (TP: RM2.49), (ii) DLADY (TP: RM56.40), (iii) KIMLUN (TP: RM2.10), (iv) KLK (TP: RM25.25), (v) KOSSAN (TP: RM8.00), (vi) MALAKOFF (TP: RM2.07), (vii) MITRA (TP: RM1.77), (viii) PESTECH (TP: RM7.43), (ix) SKPRES (TP: RM1.76), and TENAGA (TP: RM16.49) as Top Picks for the current quarter.

A surprise reversal. The recent reversal of foreign capital flow caught us by surprise following the dovish tone put across by US Federal Reserve’s Chair, Janet Yellen, encouraging investors to believe Fed is reluctant to go ahead with more aggressive rate hikes moving forward. The signal also sent the Dollar Index tumbling more than 4% since early March16. Alongside the swift rebound of Brent Crude Oil, a total RM6.1b foreign capital returned to the local equity market in March vs. the net foreign outflow of RM0.5b in the first two months of 2016. The strong capital inflow has led FBMKLCI to experience a sharp +4.2% MoM total return in March, bringing its YTD gain to 1.7%. Key index gainers last month included GENTING (+22%), TENAGA (+6%) and MAYBANK (+6%). On a YTD basis, key index gainers are GENTING (+30%), HLFG (+9%) and MAYBANK (+7%) but offset by the weak performance of UMW (-12%), DIGI (-10%) and AXIATA (-8%). The Dow and S&P500, meanwhile, posted two straight quarters of gains with 1Q16 rising 1.49% and 0.77%, respectively, mainly attributed to a combination of Fed’s dovish stance and no signs of a US recession.

Positive monthly return but still below the benchmark. Despite the positive monthly return in all our model portfolios – THEMATIC (3.4%), GROWTH (1.9%) and DIVIDEND YIELD (3.7%) in March, the returns, however, were below the FBMKLCI’s monthly return 4.2%. This was mainly attributed to the continued weak performance of Top Glove (-9% MoM), no thanks to the weaker USD, and TEXCYCLE (-7% MoM) as a result of its unexciting 4Q15 result performance. The weak performance, however, was partially cushioned by the stronger performance of PESTECH (6% MoM), TENAGA (6% MoM), and APOLLO (5% MoM). On a YTD basis, DIVIDEND YIELD Portfolio remains the top performer with YTD total returns of 3.26%, as compared to FBMKLCI’s 2.21%, followed by THEMATIC (-0.28%) and GROWTH Portfolios (-1.85%).

Source: Kenanga Research - 6 Apr 2016