Better Days Ahead? Thus far, our seasonal study has been proven right. We have seen the rise of external uncertainties as well as an unexciting 3Q to date. Should our Seasonal Study is proven correct; market could be getting better, as normally 4Q and 1Q are relatively stronger. The only caveat for now is probably the absent of a meaningful correction in 3Q17. In fact, with the recent hawkish Fed statement coupled with the geopolitical uncertainty, the recovery could be slower than expected.

Latest Numbers. The recently concluded 2QCY17 results reporting season showed signs of weakness as compared with the last two quarters. Post results and after our latest house-keeping, we have lowered our FY17E net earnings growth estimate to 0.4% (from 2.5% in 3Q17) but upgraded FY18E earnings growth to 4.6% (from 2.5% in 3Q17). Our estimates are more conservative than consensus estimates of 5.7% and 6.8% for FY17E and FY18E. However, we are fairly comfortable with our conservative view. We strongly believe that our estimates could be ahead of the curve judging from our observations between quarterly corporate earnings growth and real GDP growth. As a result, we have further fine-tuned our end-2017 Index Target lower to 1,830 (from 1,850 in 3Q17). Based on our estimates, at 1,830, the index target implies 17.8x and 17.0x at FY17E and FY18E earnings. Meanwhile, our index target is also lower than consensus target of ~1,870.

Mixed View. Having said that, the valuation of FBMKLCI seems more exciting now on a regional basis. As of end-Sept 2017, the Fwd. PER of FBMKLCI only registered a 4.1% premium over its selected regional peers, which is considered to be at the lower end of its historical range of 4%-18%. In addition, we only saw mild outflow of 40% for 2- tailed test) to surpass the 1,800-psychological level. The caveats could be the persistently high valuations of mid & small caps stocks (by historical standard). Besides, our “Accumulated Volume-Price Study” (AVPS) is also clearly showing signs of weakness in the Buying Interest of FBMKLCI and FBMEMAS. More importantly, their AVPS lines are in a flat trend, indicating no clear-cut direction at the moment. Chart-wise, the technical picture of FBMKLCI seems “shaky” with a formation of “Double-Top” pattern. Should the support zone of 1,760/50 give way, this could confirm the completion of the reversal pattern and leading to a potential downside objective of 1,720/1,700.

4Q17 Sector Outlook. Our sector ratings remain unchanged except for: (i) Automotive, (ii) Plastics Packaging, and (iii) Property sectors. For the first sector, it has been upgraded from UNDERWEIGHT to NEUTRAL while the last two sectors are downgraded from OVERWEIGHT to NEUTRAL. OVERWEIGHT ratings for Aviation, MREITs, Gloves, Power Utility and Technology/Semiconductor remain unchanged while Healthcare is the only UNDERWEIGHT sector. Worth noting that we have also seen more OUTPERFORM calls appearing in some of the NEUTRAL rated sectors. For instance, a longer list of OUTPERFORM calls are observed in (i) Banks & Non-Bank Financials, (ii) Oil & Gas, (iii) Plantation, and (iv) Property.

4Q17 Investment Strategy. Timing-wise, we believe investors should capitalise on any weaknesses to position for the stronger forthcoming quarters. This is especially true as the FBMKLCI is now trading at a discount of 6.0% against consensus index target of ~1,870, which is below its 3-year mean of 4.3% and fast approaching our ideal B.O.W. level of >6.2% discount (or <1,750, implying <-1SD-levels). As for potential theme plays, the recent run-up in commodities prices, including crude oil prices, could revive market interest for: (i) Building Material (or Metals to be exact) as well as (ii) Oil & Gas sectors. We also believe the market could see renewed interest in: (i) Consumer, and (ii) Property sectors as we head closer towards the National Budget Day, in anticipation of potential goodies to be dished out for the “rakyat”. Lately, we also see rotational play on furniture exporters that act as proxies for stronger demand from US (to leverage on reconstruction/rebuilding activities after hurricane destructions). Should US continue to hike interest rate, the stronger dollar may lead to a continuation in export plays as well. In this space, the usual suspects are gloves and semi-con sectors.

Source: Kenanga Research - 3 Oct 2017