We believe the recent market rally could be mainly sentiment and liquidity driven. While various studies suggest that underlying uptrend in the FBMKLCI remains intact, the risk of seeing short-term correction is heightening. As a result, we prefer to retain the “back to basic’ as well as laggard play strategies in our stock/sector selections and accumulate when the index pulls back to 1,705/1,760 levels. Our end-2017 index target remains at 1,775. Technically speaking, based on the closing level of 1741.72, the FBMKLCI’s support could be found at 1,740 (S1) and 1,727 (S2) while the key resistance levels are seen at 1,750 (R1) followed by 1,760 (R2). In line with broader market, our OR tracker portfolio’s return is also up, by 9.8% MoM, widening our YTD-end March advance to 18.5%. The average return between realised OR portfolio and unrealised OR tracker since inception of 26.8% still fared better than the barometer index’s total return of 22.3% over the same period.

Recommending five stocks in March. We issued five On Our Radar (OR) reports in March with two Trading Buy and three Not-Rated pieces. We reiterated our Trading Buy call on ELSOFT with a higher target price of RM1.90 as the group is set to record 15% YoY net profit growth in FY17 underpinned by higher orders from Automotive segments, and better product mixes. Besides, we also maintained our optimistic view on ECS albeit at a lower fair value of RM1.67 given that the group will benefit from the system replacement cycle, but the upside may be capped by the prolonged consumer sentiment as a result of rising cost of doing business. Meanwhile, we also issued three Not-Rated note on GHL (FV: RM1.44), HEVEA (FV: RM1.50) and PWF (RM0.80-RM0.86) in view of their respective rich valuations.

A cheerful month. Local equities continued to explore higher grounds in March, thanks to steadier crude oil prices as well as improved trading sentiment following the return of foreign funds and strong mid-and-small cap trading interests. The mini bull, indeed, has lured strong market interest as witnessed by the record daily Bursa’s volume/value traded at 6.0b shares/RM5.0b (last seen since mid-2014/2016, respectively) during the mid of March. Stocks on the home front continued taking comfort from a higher regional trend (encouraged by hopes for stimulus policies in the US) as well as stronger Ringgit, extending the FBMKLCI’s total return to 6.79% (3.15% MoM) by end-1Q17. CIMB (+15%) was the main index gainer last month followed by AXIATA (+16%) and MAYBANK (+3%).

2Q17 strategy. While the fundamentals have remained largely unchanged, the market has been performing stronger than expected thus far. As a result, we believe the recent market rally could be mainly sentiment and liquidity driven. The risk of a short-term correction, meanwhile, is heightening despite various studies suggesting that underlying uptrend in the FBMKLCI is intact. As such, we continue to prefer “Buy On Weakness” strategy, if and when the index pulls back to 1,705/1,670 levels. “Back to Basic” strategy remains our preferred strategy in stock/sector selections. Besides, we also prefer laggards to minimise the risk of price corrections.

Overall tracker performance remained decent. After removing PWF, our OR tracker list has been reduced to 39 stocks. Together with 84 stocks in the realised portfolio, the average total return for the tracker stocks (+18.5% in 1Q17) and realised portfolio (+25.6%) since inception in Aug 2012 is 26.8%, which continued to outpace the FBMKLCI’s total return of 22.3% for the same period. CAB (+142%) is the top performer under our OR unrealised tracker list is followed by GKENT (+111%) and SALUTICA (+105%) while the top three losers, on the other hand, are EA TECH (-49%), KNM (-39%) and BP PLASTIC (- 17%). Meanwhile, PESTECH (+226%), VS (+205%) and MITRA (+153%) remained as the top three realised winners in our tracker list. On the flip side, K1 (-60%), SAPRES (-37%) and HOHUP (-33%) are the top three losers.

Source: Kenanga Research - 10 Apr 2017