Temporary Bottom? Despite inspired by the Malaysian Sovereign Rating upgrade, we do not rule out that a temporary bottom could have formed as the recent price corrections were steep in nature and the “Discount” between FBMKLCI to its consensus index target has widened to 7.5%, which is the -2SD-level below its trailing 3-year mean of 4%. Moreover, we gathered that the “Premium” of FBMKLCI valuation, as per consensus Fwd. PER, has also been narrowing against regional peers. Besides, we also believe the decline in average foreign shareholding of FBMKLCI could taper off. This is because the average foreign shareholding is still on an uptrend since early 2013 and the recent decline in the average foreign shareholding has been deviating from its regression trend significantly, which could suggest an “oversold” condition, at least in the short-term.
Nonetheless, downside risk remains intact. Owing to
both domestic and external uncertainties, coupled with the negative technical
picture and weaker investment sentiment as well as higher market volatility, persistent
foreign outflow could be a concern despite the reasonably strong domestic
liquidity. Besides, we also notice that the market dynamics are highly
correlated to share financing as well. So far, FBMKLCI and its Fwd. PER have
been declining in tandem with the lower percentage of Loan for Share Financing
to Total Loan. Should this lending continue to decline, this will put pressure
on the equity market.
Therefore, we have lowered our index target lower to
1,810 (from 1,845 earlier) on lower target FY16E PER (18.4x vs. 19.0x
earlier) and minor earnings and target prices adjustment. This target is also
backed by FY15E earnings growth of 2.5% and a stronger growth of 7.8% in FY16E.
Focused Sector & Stock Picks. We continue to like
high-yielding stocks such as BJTOTO (OP, TP: RM3.72). Stocks in
resilient sectors such as Telco, Healthcare, Education and Consumer F&B
will also be our preferred choices. Among these sectors, we choose TM
(OP, TP: RM7.80), TOPGLVE (OP, TP: RM7.90) and SASBADI (TB, TP:
RM2.68) as our 3Q Top Picks. While the weakening trend of ringgit remains
favourable to exporters, we are selective and prefer laggards. As such, we
select TOPGLVE as our Top Pick from glove sector for the quarter.
Nonetheless, we do see further upside for some exporters such as MPI
(OP, TP: RM8.90) and SLP (OP, TP: RM1.76) despite their superb
performances. Of course, we also continue to focus on our other
Overweight sectors like Construction and Logistics. MITRA (OP, TP: RM2.35) and CENTURY (TB, TP: RM1.19) are
the chosen ones from these sectors. Other Top Picks are ARMADA (OP, TP:
RM1.55), BJAUTO (OP, TP: RM3.14), and PESTECH (OP, TP: RM6.11) despite our
Neutral rating on Oil & Gas, Auto and Power Utility sectors. For short-term
traders, it is worthwhile to consider bottom-fishing stocks, especially big
caps, which are trading near their respective 52-week lows. We believe these
heavily bashed down stocks could stage a quick rebound from their recent lows.
If you to a more visual presentation of Kenanga's 3rd Quarter Market Outlook, checkout the short video clip.
Digging through the Market Strategy Report, I came across 2 long-term charts that warn us to be cautious in this market. I have appended them below:
1) Based on cycle analysis, FBMKLCI could be in a down time cycle.
2) As per Elliot Wave Theory, FBMKLCI could have peaked in 2014 at 1896.
A market caught between a possible down cycle and a potential peak is market where easy money is getting scarce. Thus, we have to be very careful in our stock selection as well as putting money at risk in this market.
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