The on-going tension between the US and North Korea continued to cloud regional markets resulting in cautious overall sentiment. However, the Malaysian market may find itself in a sweet spot in the near term following the weakening of USD and improved commodity prices. We believe these factors have yet to be reflected in the local bourse as the flattish monthly performance suggested that local investors were also affected by the same global uncertainties clouding regional markets. Technically speaking, key resistance levels for the benchmark index stands at 1,783/1,789 with immediate support levels nearby at 1,770/1,760. As the index had long trailed above our ideal Buy-On-Weakness level of <1,745, we see better days ahead in the coming quarters due to a more favourable macroeconomic outlook. Our THEMATIC, GROWTH and MPT MAXIMUM RETURN Portfolios recorded unprecedented growth in the month of August, mainly thanks to the stellar performance of PMETAL (+26.49% MoM).

Clearer local scene amidst pressures overseas. The recent heated exchanges between the US and North Korea are keeping investors at their toes, which we believe could exert a downward shift on the market following the longest bull run in DJIA’s history. Further, billions of dollars in economic damage left in the wake of Hurricane Harvey and Hurricane Irma could cause further economic drag. On the local scene, while the recent earnings report cards had proven uninspiring, the outlook may appear to be turning for the better as the recent uplifting of the US debt ceiling caused the currency to weaken, to the benefit of our local currency. Alongside general improvements in commodity prices, this could translate to better bottomline for most corporates. Hence, while the current index levels have not retraced to our ideal Buy-On-Weakness levels of <1,745, we believe investors could take a bet on weakness by taking position in the coming quarters. In fact, certain investors could have already taken the plunge as seen as per the improving readings of FBM70, which is trading close to a 3-month high.

Uncertainty all around. The local market tipped upwards by 6.08pts or 0.34% to close at 1,773.16 in August. The lukewarm sentiment appears to resonate well with most regional bourses as the present US-North Korea quarrel could have left market players in a state of indecision. Meanwhile, foreign shareholders recorded a net outflow of RM242.1m in August, marking the first month of the year for foreigners to close at a net selling position following a four-month long decline in buying interest. On domestic index components, CIMB (+8.09%), AXIATA (+6.48%) and PCHEM (+4.77%) were the top performers for the month, thanks to their decent 2QCY17 report cards. Leading the top laggard players were AMBANK (-11.29%) following the failed consolidation with RHBBANK, with other laggards being SIME (-4.76%) and IJM (-3.75%).

Strong mixes in performances. The hits and misses in earnings estimates from last month’s reporting season were reflected into our portfolio’s total monthly return. The THEMATIC Portfolio gained a meaningful 10.74%, driven by PMETAL’s (+26.49%) solid price appreciation followed by TAANN (+4.86%). Our GROWTH Portfolio also benefited from PMETAL’s upward momentum to generate a MoM return of 11.19%. However, our DIVIDEND Portfolio netted loss of 6.75% at the expense of potential profit-taking on AEONCR (-8.24%) and a sell-down on PWROOT (-11.82%) with the anticipated weaker results arising from its 1Q18 report card in released in August. On YTD basis, the THEMATIC Portfolio demonstrates the best YTD returns of 28.99%, followed by GROWTH (+24.41%) vs. the 9.74% returns in the FBMKLCI. On the flip side, the DIVIDEND YIELD portfolio performed below the bar at 2.37%, no thanks to the frail performance of PRTASCO (-17.60%). Following notable losses from PRTASCO, we have decided to cut our losses from the stock in our THEMATIC and DIVIDEND Portfolios, to be replaced with OLDTOWN. We like the stock for its growing export market share in the Greater China Region alongside its café outlet rationalisation to weed out non-performing stores to minimise operating expenses. On the other hand, the MAXIMUM RETURN Portfolio under the Modern Portfolio Theory posted 8.85% monthly gain and extended its YTD total return to 32.37% while the MINIMUM RISK Portfolio only registered a slight gain of 0.57% to improve its YTD losses of 0.62%.

Positive returns in both MPT portfolios. Both MPT portfolios in August registered positive performances, although the MAXIMUM RETURN portfolio’s total return has greatly outpaced the MINIMUM RETURN portfolio’s flattish results. Once again, the positive 8.85% gain for the MAXIMUM RETURN portfolio was mainly attributed to the continuous price growth from PMETAL (+26.49%) after it completed its share consolidation in April. On other stocks within the portfolio, PESTECH (+5.16%) and AIRASIA (+2.79%) performed fairly while SLP (-1.50%) declined further from July. On the flip side, the MINIMUM RISK portfolio registered a monthly return of 0.57%, having favourable returns from TAANN (+4.86%) and PESTECH being averaged down by immaterial returns from other stock allocations within the portfolio. Moving forward, we anticipate the MAXIMUM RETURN portfolio to continue to be more volatile than the MINIMUM RISK portfolio but with stronger expected returns given the continued emphasis on high beta stocks.

Minor adjustments to September’s stock allocation. After updating the stock performances in August, the MAXIMUM RETURN portfolio for September remains unchanged for a slightly lower estimated portfolio risk/return of 32.5%/12.9% (from 32.4%/12.7%, previously) as trading sentiment may be overheating. On the contrary, minor changes made to our stock allocation for the MINIMUM RISK portfolio, with higher allocation towards OCK, PRTASCO, PWROOT and TAAN at the expense of AEONCR, PESTECH and SLP. This revises the portfolio’s estimated portfolio risk/return to 8.5%/2.7% (from 8.6%/2.6%, previously) which could also indicate a more cautious outlook in the near term.

Source: Kenanga Research - 12 Sept 2017