FBM KLCI - Weekly Market Strategy

Likely Correction Ahead


Blue chips on Bursa Malaysia registered strong gains last week, fuelled by foreign fund buying interest as they heavily underperformed global peers, which rallied on stronger-than-expected earnings and economic data. The resolution of the debt crisis in Cyprus following the Euro10 billion (RM40.5 billion) bailout by the European Union and International Monetary Fund early last week also helped improve market sentiment.

180232_173231442722063_2708279_nFor the week, the FTSE Bursa Malaysia Composite Index (FBM KLCI) rallied 44.74 points, or 2.75 per cent) to 1,671.63, with CIMB (+47 sen), Genting Bhd (+56 sen), Axiata (+24 sen), Public Bank (+32 sen) and Maybank (+21 sen) representing more than half of the index's gain. Average daily traded volume and value slowed  to 809.7 million shares and RM1.78 billion, respectively, compared with 918.9 million  shares and RM1.63 billion the previous week.

New highs in the US equity markets and the Cyprus bailout had a spillover effect on the local market last week, which has been languishing for weeks due to general election concerns. Market brushed aside worries about uncertainties momentarily last week ahead of first quarter 2013 (Q1) window dressing activities that pushed up the index to as high as 1,681 last Friday, which was a tad closer to end-2012 closing of 1,688.

The momentum waned after hitting this level as investors chose to liquidate some of their gains and wait on the sidelines ahead of Good Friday holidays in key global markets. There is no doubt that while we have seen a complete dichotomy between weak/poor economic performance and upbeat market behaviour insome of the developed countries, the same level of optimism was sorely missing in our local market despite the economy sitting on a much stronger footing.

Understandably, the looming general election (GE) is the fear factor that kept domestic players out of sync with external markets despite the unexpectedly strong foreign interest that supported prices from correcting. Avowedly, last week's rally has partially closed the gap.

However, post-1Q13 window dressing, anticipate the  benchmark index to consolidate with some downward bias as buying momentum has been checked by profit-taking interest. Admittedly, the election overhang will persist withthe incumbent administration facing some unexpected hurdles in both its strongholds in  Sabah and Sarawak, which were regarded as safe deposits all along. It is unclear  about the investment objectives of these foreign funds that have been supporting the market  but historical trends suggest that they have strong tendencies to liquidate swiftly when the necessity arises.

 

Take Profit on Overvalued Bluechips
So it is wise to take profit on overvalued blue chips, especially those linked to the FBM KLCI. While it is acknowledged that the shareholding of government-related funds in this benchmark- linked stocks make up about 38 per cent  of total market capitalisation of FBM KLCI and they may come to their aid during price corrections, it is difficult for them to keep supporting overvalued blue chips at the expense of  their returns if they can buy them cheaper at a later stage. All the Petronas owned companies in the FBM KLCI are overvalued and trading at expensive multiples apart from Plantations stocks, except IOI Corporation. Among the banks only Hong Leong has ran ahead of its valuation while RHB Capital and Public bank provide only 4.3% and 0.9% capital upside respectively.

Except for some banks, power, telcos and plantationcompanies with high downstream exposure like Maybank, AMMB, Tenaga, Maxis andIOI Corpthat still have a good double-digit capital upside (midteens and above) based on their fundamentals among the FBM KLCI component stocks, the rest do not look like a bargain unless there is a correction. About 30 per cent of them are already trading above their fundamental valuations while another 30 per cent have an average capital upside of less than five per cent.

 

by TA Securities

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