The initial uncertainties caused by Brexit, have led to greater market volatility and risk-premium, hence boosting demand for safe-heavens at the expense of equity markets. Given the underlying unfavourable global market condition coupled with the fast-approached and weaker 3Q ahead, a swing towards 1,590 is highly probable. As such, we have lowered our Buy On Weakness (B.O.W.) level to below 1,600-psychological support (from 1,630 previously) while our end-2016 Index Target of 1,725 is under reviewed. In the forthcoming 3Q Investment Strategy, we are likely to reiterate names with defensive nature and reasonable decent dividend yield i.e. DLADY (OP; TP: RM59.20), TENAGA (OP; TP: RM17.50), HEIM (OP; TP: RM16.90), SUNREIT (OP; TP: RM1.74). At the same time, we also like those companies that have delivered QoQ and YoY growth in the recently concluded reporting season i.e. AEONCR (OP; TP: RM15.12) and AIRASIA (OP; TP: RM3.41). Besides, as US dollar could fast appreciate due to its safe-haven status, we believe some of the export counters may back to investors' radar screens i.e. KOSSAN (OP; TP: RM8.00), SLP (OP; TP: RM2.24), TGUAN (OP; TP: RM4.19) and VITROX (TB; TP: RM3.95).

The historical moment - "Brexit" had won. Last Friday, UK voters have decided to quit the European Union (EU). Within 24 hours after the election results, investors already began to punish the UK financial market for choosing Brexit. FTSE 100 declined ~200 points on last Friday (or -3.1%) and Pound Sterling depreciated by 8.2% and 5.7% against US dollar and Euro dollar, respectively. At the same time, the US ratings agency - Moody's – have also announced that it had lowered its outlook on UK's credit rating from stable to negative. Similarly the global financial markets (that had rallied over the preceding 4 days on expectations of better odds on "Remain" win) fell sharply as well. For instance, Dow Jones Industrial Average (DJIA) tumbled >600 points (or >3%) on last Friday night.

UK - Short-term pain, long-term gain? In the short-run, Brexit has inevitably caused initial fear of uncertainties, hence boosting demand for safe-heavens (i.e. government bond and gold to a certain extend), at the expense of equities (especially for emerging markets) and perhaps industrial commodities as well. This is a classic case of higher uncertainties leading to greater market volatility and risk-premium. However, we are more interested to consider what may happen next. For instance, would this event be labelled as a "Black Swan" that would trigger a new round crisis? To be frank, we downplay this expectation at this juncture.

In our view, despite uncertainties over the long-term prospect of UK and EU, there are good reasons to believe that Brexit will not result in a deep and prolonged global shock that many are concern. This is because we understand that the Article 50 of the Lisbon Treaty allows for a period of negotiation of up to 2 years. This means that the existing institutional arrangements (related to trades and etc.) would remain in place for the time being. Hence, there would be sufficient time to resolve at least some, if not all, concerns and uncertainties surrounding the UK’s departure before exit actually take place. Besides, the new policy maker may introduce additional supporting measures, including further monetary easing. Still uncertain! Nonetheless, we cannot rule out a potential case of "Black Swan" if and when Brexit prompts the euro-zone crisis to flare up again, as more countries decide to follow the path of UK. On the other hand, the fate of global markets may also depend on how the Fed responds, i.e. continue to raise or keeping US interest rate low for a longer period. Even for Pound Sterling, while we see it falling (faster than Euro dollar) immediately after a vote for Brexit, Pound Sterling dominated assets could turn out to be a safe-haven if and when EU turns out to be a bigger problem, especially when Euro dollar losing its shine as a reserve currency.

For the local equity market, as the historical volatility of FBMKLCI is still stuck near the lower-end of its historical range (see Figure 1), which is not sustainable, we do not rule out that it may stage a breakout and revert back to its mean in line with the underlying trend of higher global volatility. Besides, it is also reasonable to believe that the domestic equity market would oscillate in a volatile manner for a period of time, when we approach the 3Q16, which is historically the weakest quarter for the year (see Figure 2).

Source: Kenanga Research - 27 Jun 2016