With the strong performance of Wall Street, strengthening of MYR against USD coupled with consensus upgrading of index target, the local equity market is expected to remain buoyant, at least in the near term. In fact, foreign investors are still net buyers in local stocks. Nonetheless, we are cautious in view of the weak sentiment since mid-May and tougher quarter ahead as we will soon enter the historically weakest quarter, the 3Q. As such, we adhere to Buy on Weakness strategy when the key index dips below 1,735, focusing on laggard and defensive stocks. Portfolio-performance-wise, we had a mix bag of results with THEMATIC Portfolio and MPT MAXIMUM RETURN Portfolio being the two major losers on profit taking activities.

Momentum still growing? Although profit-taking activities emerged in mid-May and the market had since consolidated before the good showing last Friday, market indicators are still pointing to an uptrend. This is, in fact, tracking the stronger performance on Wall Street as the three major indexes, Dow Jones, S&P500 and Nasdaq, all hit fresh record highs last week, as there is hardly any fresh catalyst domestically. On the positive note, consensus has upgraded end- 2017 index-target despite an uninspiring 1QCY17 reporting season. Technically, the FBMKLCI needs to overcome the immediate hurdle at 1,784-1,787 levels before investors can look forward to a more decisive push towards 1,800 next. In all, we remain cautious given the persistent lack of catalysts and we will also soon enter 3Q17 where 3Q is historically the weakest quarter. As such, we adhere to Buy on Weakness strategy when the key index dips below 1,735 on laggards and defensive stocks.

First monthly decline in 2017. After a good run since the end of last year, the local market finally took a breather with a short-term correction in May, which saw the key index dipping slightly by 2.19pts or 0.12% MoM to settle at 1,765.87. This was especially so in the second half of May where the FBMKLCI was in a consolidation mood with no convincing catalysts to propel the market higher while market sentiment was marred by the uninspiring 1QCY17 reporting season as well as declining Crude oil prices. On the other hand, mid-to-small caps also faced profit-taking activities after the recent rally. In fact, the FBMSC index was in a technical pullback on the back of declining trading volume. The market laggards in May were IHH (-6.31%), GENM (-3.39%) and DIGI (-2.79%). In addition, other Celcos like MAXIS (-2.85%) and AXIATA (1.36%) also witnessed selling pressures. On the flipside, as the market turned cautious, investors snapped up banking heavyweights such as CIMB (+11.50%), MAYBANK (+1.94%) and PBBANK (+0.50%). On Wall Street, US markets had a volatile month in May, which saw the Dow Jones nose-diving to its monthly low of 20,606.93 in the mid-month as concerns heightened over President Trump’s capability to deliver his political agenda and questions surrounding the dismissal of the former FBI Chief. However, the US stocks managed to pick up momentum on the back of strong economic data as well as multi-billion dollar arms deal between the US and Saudi Arabia sent the Dow Jones to the positive territory.

A mix bag of portfolio performances. As the market turned cautious, investors locked in profits in stocks with solid gains in the past few months. Our portfolios were also badly affected as some invested stocks, such as PMETAL (-11.94%), AIRASIA (-11.04%) and SLP (-12.31%), which had good runs previously faced profit-taking activities. As such, THEMATIC Portfolio was the main loser with monthly loss of 8.61% followed by GROWTH Portfolio -7.55% as opposed to FBMKLCI’s total monthly returns of +0.52%. However, against the odds, DIVIDEND YIELD Portfolio posted monthly gains of 5.78% thanks largely to AEONCR (+17.50%) as investors chased after this laggard non-bank financier. YTD, GROWTH Portfolio remained as the top gainer with YTD total return of 12.95%, against the FBMKLCI’s 9.13%, followed by THEMATIC Portfolio (+11.45%) and DIVIDEND YIELD (+7.38%). On the other hand, the MAXIMUM RETURN Portfolio under the Modern Portfolio Theory posted 8.91% monthly loss reducing YTD total returns to 17.33% while the MINIMUM RISK Portfolio widened its YTD total returns to -2.26% after losing 1.94%.

MPT portfolios were badly hit too. In tandem with overall market sentiment mentioned earlier, the performance of the two MPT portfolios also posted decline in performance with MAXIMUM RETURN Portfolio’s total monthly returns falling 8.91% while MINIMUM RISK Portfolio’s dipping 1.94% over the month in May. This came as no surprises given that selected stocks in the portfolios already had a good rally in the past few months. As such, as the market turned cautious, investors were quick to take profit from these stocks. MAXIMUM RETURN Portfolio was badly hit this round due to its concentration on PMETAL, SLP, PESTECH (-2.94%) as well as AIRASIA whereas the impact to MINIMUM RISK Portfolio was less-severe due to its main concentration of 30% allocation each in the index-linked FBMKLCI-EA (-0.27%) and conservative low beta KLCC (-0.26%) and the remainders in a well-spread selection among six stocks. YTD, the total returns for MAXIMUM RETURN Portfolio declined to 17.33%, which is still far more superior than our non-MPT portfolios as well that of FBMKLCI while MININUM RISK Portfolio’s YTD total losses widened to 2.26%. Going forth, these two MPT portfolios will largely move along with market performance with MAXIMUM RETURN Portfolio expected to be more volatile than the MINIMUM RISK Portfolio given the former’s focus on high beta stocks whereas the latter consists of more low-beta stocks to minimise the risk exposure.

Source: Kenanga Research - 7 Jun 2017