2Q18 has proven to be a weaker and yet volatile quarter, as expected. In the forthcoming 3Q18, we do not rule such lackluster trading interest or investment sentiment to continue as some investors may stay side-lined or stay defensive while waiting for the release of the new Government’s 100-day progress report or the First Budget of the new government. However, we have taken a bold stance that the local market could have bottomed. This is because the Discount between FBMKLCI and its Consensus Target has dipped below 1,735-level or the -2SDlevel for the 3-year Historical Band. Hence, the FBMKLCI index is deemed to have venture into an “Oversold” territory as far as our Timing Model is concerned. A reversion back to the mean level would send the index back to 1,830 or +8% from here. Apart from looking at the OVERWEIGHT sectors, say Power and Telco, we also like some heavily bashed down stocks. Sectors/stocks that deemed as beneficiaries of zero-rated GST; i.e. Auto and Consumer, are also our favourites. We have AMBANK (OP, TP: RM4.50), AWC (TB, TP: RM0.850), BIMB (OP, TP: RM4.90), D&O (OP, TP: RM0.810), DIGI (OP, TP: RM4.90), LAYHONG (TB, TP: RM1.20), MBMR (OP, TP: RM3.30), PARKSON (OP, TP: RM0.860), SLP (OP, TP: RM1.00), TCHONG (OP, TP: RM2.30), TENAGA (OP, TP: RM17.90) and UEMS (OP, TP: RM0.970) as our 3Q18 Top Picks.

What to expect in 3Q18? FBMKLCI has been trending down after the gap of 1,770/80 was filled amid a lack of re-rating catalyst. In the immediate term, it has found a temporary bottom near the 1,660/50-area. Should the index is able to overcome the 1,700-physiological resistance in the near term, this could suggest a near-term bottom. Besides, based on our Monte Carlo Simulation Study, we still expect high probabilities for FBMKLCI to trade between 1,750 and 1,800. However, we have yet to see confirmation signal from our Accumulated VolumePrice Indicators. Moreover, we also reckon that some investors may stay side-lined or stay defensive while waiting for the release of the new Government’s 100-day progress report or the First Budget of the new government. The swift recovery of FBMKLCI could also be limited by the premium valuation of FBMKLCI due to the stronger sell-down over its regional peers.

Mid-and-small-cap stocks to outperform soon? While we do not discount potential revivals in mid-and-small-cap stocks, there is no conclusive finding from our studies - (i) Accumulated Volume-Price, (ii) Market Sentiment, and (iii) “Pair Trading” - to suggest the unfolding of such a scenario.

Latest Numbers and Index Target. Post results, we have lowered FY18E/FY19E earnings growth estimates to 5.1%/5.4% (from 6.1%/6.0% previously). Note that, post revisions, our estimates are not far from the consensus estimates of 5.4%/6.8% (vs. 5.7%/7.3% previously). Furthermore, due to our earnings and target price downgrades, and coupled with weaker investment sentiment, we have also revised our end-2018 index target lower to 1,900 (from 1,950 a quarter ago), representing FY18E/FY19E PER of 16.1x/15.0x.

3Q18 Sector Outlook. Generally speaking, our various sector ratings remain pretty much unchanged after we downgraded our ratings for Construction and MREITs to Neutral (post GE14 and recent results). However, due to sharp price corrections, we have upgraded Telco sector to Overweight even after we cut our earnings estimates and target prices as we believe values have emerged after the recent strong sell-down.

3Q18 Investment Strategy. We make a bold stance that the local market could have bottomed. Even if we were wrong, we believe the downside could be limited to 1,615/00 as well. In fact, based on our Timing Model, we strongly believe that an immediate rebound from here is highly probable. This is because the Discount between FBMKLCI and its Consensus Target (“The Discount”) has dipped below 1,735-level or the -2SD-level for the 3-year Band. Currently, The Discount is recorded at ~12%, which is far lower than the -2SD-level of -10.0%. Hence, the Index could have dipped into an “Oversold” territory as far as our Timing Model is concerned. A reversion back to the mean level would send the index back to 1,830 or +8% from here.

Source: Kenanga Research - 3 Jul 2018