There are rooms for the FBMKLCI to experience some short-term corrections in view of the continued lack of fresh catalyst coupled with unfavourable technical readings. As such, a “Buy on Weakness” strategy is still our preferred approach during the seasonally weakest quarter and we will turn into buyers when the index falls to our ideal buying zone at 1,750/1,720. For now, the key index is supported at 1,754/1,730 levels while resistant levels are capped at 1,771/1,795. Portfolio-performance-wise, THEMATIC and GROWTH Portfolios continued to outpace the overall market while DIVIDEND YIELD Portfolio slid 2.0% in June. Meanwhile, the performance of MAXIMUM RETURN Portfolio under the MPT model continued to run ahead of MINIMUM RISK Portfolio on YTD basis.

Be patient. While we expect the FBMKLCI to close higher by year-end at 1,850, we believe the benchmark index is likely to take a breather in 3Q before trending higher. The recent concluded 1QCY17 results reporting season had continued to show signs of improvement and prompted us to raise our FBMKLCI’s FY17E/FY18E net earnings growth to 2.5% each (vs. -0.4%/-0.5% in the previous quarter). Despite such earnings revision, we believe our estimates are still conservative as compared to consensus forecast of 6.6%/7.3%. The potential upside, however, appear limited (<5%) coupled with the seasonally weakest quarter in 3Q, suggested that the market may undergo a correction in the coming months. All in all, we prefer to adopt a more conservative stance and only apply a ‘Buy on Weakenss’ approach, if and when the index corrects to our B.O.W. zone of 1,750/20.

Rate hike concerns. The continued foreign buying coupled with positive sentiments pushed the FBMKLCI higher in the 1H of June. Indeed, the benchmark index advanced to an intra-day high of 1,796, or nearly a 2-year high, in 16-June before the consolidation kicked in and settled at 1,763.67 (-0.12% MoM) by the month-end. Sentiment on the broader market generally turned cautious in mid-June amid expectations that BNM will raise the overnight policy rate soon. Indeed, a slew of hawkish comments from various central banks signalled that the era of cheap money is coming to an end. The FBMKLCI had climbed 7.4% in 1H17 (or 0.82% QoQ in 2Q17), thanks to the continued net positive foreign inflow (which led the RM to gain 4.3% against the USD over the same period) and moderate economic data as well as corporate earnings. The sturdy index performance in 1H17 was mainly driven by CIMB (47%), MAYBANK (25%) and SIME (18%). Small caps, meanwhile, were also traded actively and outperformed the benchmark index by a wide range with a YoY change of 18.5% for FBMSC during the same said period. Furthermore, major US stock indices also continued to trend upwards in 1H17, mainly driven by the decent economic data (pointing to a slow-but-steady economic expansion) as well as moderate corporate earnings amid continuing political uncertainty. The DOW and SPX500 have gained 8.03%/8.24% in 1H17 with 8.33%/8.42% on a YTD basis, respectively.

Decent portfolio returns in June. Despite merely invested 79%/75% of the allocated amount, our THEMATIC and GROWTH portfolios continued to perform well in June and advanced by 4.7%/2.1% MoM, respectively, outperforming the barometer index total return (0.01% MoM). These portfolios were mainly driven by higher performance of AIRASIA (+11% MoM, as the sale of its leasing arm - Asia Aviation Capital, come closer to fruition with a potential round of special dividends), and PMETAL (+5.4%, ahead of the group’s internal reorganisation plan) on top of the decent dividends received during the month. The DIVIDEND YIELD portfolio, however, performance below the bar at -2.0%, no thanks to the weak performance of PWROOT (-9%) as a result of the disappointing FY17 report card due to higher taxation and soften domestic sales. Having said that, we continue to remain optimistic on the group’s export market (where revenue grew +28% YoY in FY17) with growing market share, which could be sufficient to offset the subdued domestic demand. On the other hand, the MAXIMUM RETURN Portfolio under the Modern Portfolio Theory posted 2.46% monthly gain totalling YTD total returns to 20.2% while the MINIMUM RISK Portfolio managed to narrow its YTD total returns to 0.23% after gaining 2.54% in June.

MPT portfolios showed identical performance in June. The performance of the two MPT portfolios showed similar performance in June where the MAXIMUM RETURN Portfolio managed to recoup some lost grounds (after it posted a decline of c.9% in May as the market turned cautious) with total monthly returns of 2.46%, which was higher than the benchmark index’s returns of -0.12%. This is not a surprise as the market regained an upward trend in 1H last month before consolidation kicked in the 2H. The decent monthly return was mainly driven by the fairly good price performances of PMETAL, AIRASIA and SLP (which collectively accounted for 70% of our June’s portfolio weighting) but partially offset by the poorer performance of PESTECH. The decent performance in June led the MAXIMUM RETURN portfolio to regain its YTD gain to the above 20%- mark. The MINIMUM RISK Portfolio, meanwhile, posted its best monthly returns with 2.54% MoM gained in June, thanks to FBMKLCI ETF, KLCC and TAAN as the defensive names have regained investors’ favour in view of potential rate hike going forward. On YTD basis, the MINIMUM RISK portfolio managed to climb above the positive territory after a mild gain last month. Moving forward, we are of the view that the MINIMUM RISK portfolio should outpace the MAXIMUM PORFOLIO over the next few months given investors’ tendency to focus on the low beta stocks/sectors to minimise the risk exposure during uncertain times.

Turning cautious. After updating the stock performances in June, the July’s MPT model for the MAXIMUM RETURN PORTFOLIO suggested no change in invested stock selection except the stock weighting where PESTECH’s weighting has been reduced to 10% (vs. 30% in the previous month) while AIRASIA is increased to 30% vs. 10% last month. The estimated portfolio risk/return have been revised to 33.0%/14.0% (vs. 28.7%/14.6%, respectively), suggesting that trading sentiment may be turning cautious.

On the flip side, the MINIMUM RETURN PORTFOLIO’s estimated portfolio risk/return appear relatively stagnant (8.5%/2.7% vs. 8.6%/2.6% in June) in July. While there is no new stock added into our MINIMUM RETURN PORTFOLIO, the MPT did suggested to revise the portfolio stocks’ weighting accordingly. OCK’s weighting gained the most (9.3% vs. 5.5% in June) at the expense of PESTECH, AEONCR, and TAAN. The portfolio’s core holding stocks – FBMKLCI-EA and KLCC’s, stock weighting remain unchanged at 30% each.

Source: Kenanga Research - 11 Jul 2017