In a nutshell, we believe the market will likely to be volatile in view of the more aggressive rate hike decision in the US. Besides, policy and direction of the Trump’s presidency could spark more uncertainties. The underlying market conditions seem mixed and the relatively low excess liquidity in the domestic banking system remains a concern. Coupled with the underlying weak tone in ringgit, we have yet to see a strong reversal in foreign fund flows. The good news, however, could be the emergence of a General Election theme play, which could uphold the local equity market’s investment sentiment. Fundamentally, our FY16E/FY17E earnings growth estimates are pegged at -4.0%/6.0%. As such, we reckon that 2017 could be another range-bound year with a year-end index target of 1,732, implying c.6% upside from here. For stock picks, apart from capitalising on visible thematic plays, we have also employed a two-prong approach – (i) Buy defensiveness/resiliency and (ii) Bottom-Fish laggards or underperformed/heavily sold down stocks. Based on this strategy, we select (i) HEIM (OP, TP: RM18.48), (ii) PMETAL (OP, TP: RM2.00), (iii) PWROOT (TB, TP: RM2.56), (iv) SCGM (OP, TP: RM4.05), (v) SLP (OP, TP: RM3.18), (vi) TOPGLOV (OP, TP: RM5.92), (vii) AEONCR (OP, TP: RM17.76), (viii) KLCC (MP, TP: RM7.84), (ix) PAVREIT (OP, TP: RM1.89), (x) PRTASCO (TB, TP: RM1.52), (xi) YINSON (OP, TP: RM3.79), (xii) OCK (OP, TP: RM0.96), (xiii) OLDTOWN (OP, TP: RM2.11), (xiv) SKPETRO (OP, TP: RM1.88) and (xv) TM (OP, TP: RM6.98).

What are the emerging trends in 2017? Despite the relatively uninspiring investment sentiment, we could potentially see pockets of investment/trading opportunities arising from the anticipated trends such as: (i) General Election (GE) Play, (ii) Higher Inflation, (iii) Detariffication in Malaysian General Insurance Sector, as well as (iv) The rise of Dark-horses (owing to stronger Crude Oil and Crude Palm Oil prices).

Apart from the abovementioned trends, we also expect some specific sectors/stocks to outperform, for instance, exporters (such as plastics packaging players and gloves manufacturers) should continue to do well on the expense of weaker ringgit. The rising price trend in commodities will be another plus point for upstream plantation players as well as other commodities exporters such as PMETAL. Low-risk appetite investors may also consider looking at some yield stocks such as MREITs. For higherrisk appetite traders, they may also consider stocks that underperformed severely in 2016 (particularly blue-chips and those stocks that were heavily sold down by foreign investors) to position for any potential rebound if and when market sentiment turns more positively especially if the abovementioned GE play materialize. Note that the average foreign shareholding of FBMKLCI (excluding strategic shareholdings) was estimated at 18.1% as of end-Nov16. This level is fast approaching the low of 15.1% in end-Sep11 during Euro Debt Crisis.

What sectors/stocks to be downplayed? In general, we are taking a step back and re-look into (i) bigticket item sectors, i.e. auto and property; (ii) high import content sectors, and (iii) gaming industries, as they are likely to see higher volatility in earnings in 2017. Besides, with the underlying trend of rising commodity prices, we may see pressure in profit margins for: (i) Construction players, (ii) F&B producers, and (iii) Airlines despite our OVERWEIGHT calls on construction and aviation sectors. Other OVERWEIGHT sectors are (i) Gloves, (ii) Plastics Packaging, and (iii) Power Utility. For UNDERWEIGHT calls, we have (i) Automotive, and (ii) Healthcare. Other sectors are rated as NEUTRAL.

Source: Kenanga Research - 4 Jan 2017