Better days ahead. We are now at the beginning of the seasonally stronger quarters of 4Q and 1Q, which could be a buying opportunity due to the recent price weakness. On the marco front, MYR has stabilised at c.4.20-level against the USD while crude oil prices also staying above the USD55/bbl-level as these are the two main factors driving the overall market sentiment domestically. On the flipside, the recent hawkish Feb statement coupled with the on-going geopolitical tension could place some pressure on the market. Technically, a bullish reversal signal was generated earlier last week, with the new highs on Wall Street and improved sentiment in the key Asian markets. The overall technical picture suggests that bargain hunting activities are likely to emerge in the weeks ahead. The resistance levels to watch are at 1,783/1,796 while support levels are at 1,755/1,750. Our ideal “Buy on Weakness” is 1,750 with our end-2017 Index Target of 1,830.

A lacklustre month in September. The local market started the month of September with a positive note. However, the ongoing geopolitical friction between US and North Korea turned investors cautious on their investment decision. Not helping was foreign investors selling local stocks in second half of the month, which dragged the overall sentiment southbound, following the Fed’s announcement that it would shrink its balance sheet by USD4.5t through quantitative tightening, the reverse of QE in October. This poses risk to emerging markets like Malaysia. This led to a 2nd consecutive month of foreign net outflow, totalling RM737m in September against RM242m net outflow in the previous month. But, YTD foreign flows were still positive at RM9.04b. On the positive note, MYR remained healthy hovering at 4.20 per USD-level while crude oil prices were also on an uptrend which was maintained at USD55 to USD60 per bbl and prompted investors to snap up oil & gas stocks. At the end of the month, FBMKLCI closed 17.58pts or 0.99% lower to settle at 1,755.58 which was attributed to the declines in CIMB (- 11.01%), GENM (-7.71%) and IHH (-10.18%). On Wall Street, despite the geopolitical issue with North Korea, the US market continued its uptrend which saw all three major indexes namely Dow Jones, S&P 500 and Nasdaq hitting new record highs as the Fed indicated the possibility of another rate hike this year while the fundamental within the economy system remained strong.

However, a better portfolio performance. Despite the overall lacklustre month for the local market, our portfolios managed to perform fairly well thanks largely to PMETAL (+5.01%) as its share price continued to rise higher as well as the price recovery of PWROOT (+7.22%). Other noticeable gainers were AIRASIA (+3.92%), AEONCR (+2.88%) and KLCC (+2.56%). THEMATIC Portfolio was the best monthly performer with monthly gain of 2.04% in September against FBMKLCI’s -0.61%, followed by DIVIDEND YIELD (+1.83%) and GROWTH Portfolios (+0.80%). However, the gains were capped by losses at OLDTOWN (- 4.48%), PESTECH (-4.29%) and SLP (-3.55%). YTD, THEMATIC Portfolio remained the top performer with 28.56% total YTD gains followed by GROWTH Portfolio (+23.14%) but DIVIDEND YIELD Portfolio’s 2.00% came below FBMKLCI of 9.53%. On the other hand, both MAXIMUM RETURN (+2.50%) and MINIMUM RISK Portfolios (+1.60%) under the Modern Portfolio Theory beat the 30-stock index on a monthly basis which extended their total YTD returns to 35.68% and 0.97%, respectively.

Positive returns for both MPT portfolios. Like the previous month, both MPT portfolios in September registered positive performance thanks largely to the core-holding stocks that posted commendable gains. The gains in PMETAL and AIRASIA were offset by PESTECH (-4.29%) and SLP, which helped to push the MAXIMUM RETURN Portfolio’s monthly returns higher by 2.50%. On the other hand, the gains in core-holding stocks such as KLCC and TAANN (+0.82%) was capped by losses from the small holdings in OCK (-0.55%), PESTECH and SLP, hence resulting in a lower monthly returns of 1.60% for the MINIMUM RISK Portfolio. With this, total YTD returns for MAXIMUM RETURN Portfolio increased to 35.68% as of end September while MINIMUM RISK Portfolio turned profitable to total YTD returns of 0.97% for the same period. Going forth, 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 change in stock allocation for October. After updating the stock performances in September, the MAXIMUM RETURN portfolio for September remains unchanged with estimated portfolio risk and return reducing slightly to 32.3% and 12.3%, respectively, in October from 32.5% and 12.9% previously while risk-to-reward rose to 1.31x from 1.26 in September. On the other hand, there is some fine-tuning in stock weighting in MINIMUM RETURN Portfolio with higher allocation towards OCK, PESTECH, SLP and TAANN at the expense of PWROOT, AEONCR, PRTASCO. This leads to the change in portfolio’s estimated portfolio return being reduced to 2.7% from 2.8% but there are no changes to estimated portfolio risk of 8.5%. As such, risk-to-reward the ratio has increased to 1.57x from 1.52x previously.

Source: Kenanga Research - 9 Oct 2017