While the market currently lacks re-rating catalysts, we are not giving up on it yet. On the contrary, based on our Market Cycle Study’s findings; we are actually getting excited. Based on this latest study, we believe the local equity market could be in the midst of forming a bottom over the next six months. Here’s the kicker; after the bottoming, we could potentially see the comeback of a bull cycle that would probably lead the market to chart new highs in the next 1-2 years. Long-term story aside, we believe any market weaknesses could offer good buying opportunities, based on favourable reward-to-risk consideration, as per our Simulation Study. And, our timing model also suggests that ideal buying levels are below 1,622 (the -1SD-level or 7.6% discount to consensus index target of 1,755). Based on our investment Strategy, we have selected BAUTO (OP, TP: RM2.85), BJTOTO (OP, TP: RM2.65), BURSA (MP, TP: RM7.60), CMMT (OP, TP: RM1.25), MAYBANK (OP, TP: RM10.20), MBMR (OP, TP: RM3.45), MBSB (OP, TP: RM1.15), PADINI (OP, TP: RM4.25), PWROOT (OP, TP: RM1.65) and SAPNRG (OP, TP: RM0.430) as our 2Q19 Top Picks.

Fundamentally speaking, there is nothing much to talk about. Our FY19E/FY20E earnings growth rates for FBMKLCI have been fine-tuned to 17.6%/2.4% from 14.2%/3.4% (recall that the growth in FY19E is due to low base number in FY18A). In line with our minor earnings and target price upgrades post recent corporate results, we have further fine-tuned our end-2019 index target higher to 1,750 (from 1,735 previously), representing FY19E/FY20E PERs of 18.5x/17.5x.

2Q19 Remains Lacklustre? The absence of re-rating catalysts is capping the market upside and has also clamped the investment sentiment. Based on market data, there are more “cons” than “pros”. For instance, the FBMKLCI is still relatively richer in valuation vis-à-vis its regional peers, especially the North-Eastern region. As such, we do not rule out continuous foreign outflows, especially after MSCI recently increased the weighting of China A shares. Moreover, buying momentum remains uninspiring in general as per our Volume-Price study.

However, we turn contrarian after our long-term Market Cycle study. The FBMKLCI is expected to chart a potential turning point (or a bottom in this case) between Dec-18 and Sep-19 before seeing a potential upswing that could lead to new highs between Oct-20 and Aug-21. The FBMKLCI Cycle Study is also reinforced by the long-term Cycle Study of S&P 500. The U.S. equity market could still be far from its best and worst days as the projected major peak and trough are only expected in 4Q21 and 3Q23, respectively. As such, the U.S. equity market is believed to be still in its secular bull run and there is still a long way to go before meaningful corrections start to set in. Therefore, in the absence of any major external shocks, we have a higher chance of seeing the local equity market unfolding its potential upcycle.

2Q19 Sector Outlook. We only have one OVERWEIGHT call on Gaming sector, as we have downgraded Aviation and Utilities sectors to NEUTRAL from OVERWEIGHT post the recent results season. At the same time, as we have also ungraded Gloves and Plastic Packaging sectors from UNDERWEIGHT to NEUTRAL, leaving only two (2) sectors labelled as UNDERWEIGHT at the moment. The others are rated NEUTRAL.

2Q19 Investment Strategy. In this quarter, we will focus on: (i) laggards, (ii) defensive and high-yield counters, and (iii) potential beneficiaries of interest rate cut. Other than that, we also emphasis on Auto sector as we have seen more upgrades thus far due to expectations of better numbers as well as attractive valuations. In view of the stronger Brent crude oil prices, we have also been searching for laggards within the sector. Last but not least, with the bullish cycle study, we also believe BURSA is well positioned to capitalise on this potential bull run.

Source: Kenanga Research - 2 Apr 2019