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Parliament has been dissolved, so what’s next?

Malaysia GE13 Investment strategies

 
Prime Minister Datuk Seri Najib Razak has dissolved parliament to pave way for the nation’s 13th General Election (“GE”). The market experienced a roller-coaster ride after the announcement. The index fell to an intraday low of 1,632.28 from the day-high of 1,692.85 but was able to close at 1,685.40. While the day-low was way above our “Buy On Weakness” (“B.O.W.”) level of <1,600, the intraday high, however, was very much near our “Sell On Strength” (“S.O.S.”) zone of >1,695. We are still maintaining our range-bound and NEUTRAL market view for now. Our index target of 1,705 is kept unchanged. However, we shall review our market and investment strategies post the GE.

Technically speaking,  the FBMKLCI swung from the upper uptrend channel line to the lower uptrend channel line before closing almost unchanged for the day. At this juncture, the index is still capped below both the upper immediate uptrend channel line and the upper intermediate downtrend channel line. A successive breakout above this combined resistance levels should see the index retesting the 1,700-psychological resistance. Otherwise, the index is likely to be trapped in a range-bound mode.

 

Index movement between the dates of GE was announced and GE was held during 2008:
election klci


Within expectations.The 3.6% wild swing is also pretty much in line with the historical sell-down in the past of 4.2% on average based on the last 3 GEs (see Figure 2-4). Besides, such resiliency also reinforces our arguments of: (i) a strong liquidity in the market and that (ii) all possible outcomes of the GE could have been priced in.

Downside limited? While we do not entirely rule out that the downside risk still exists, the index is likely to fluctuate in a tight range, albeit with upward biased to regain its lost ground as per our GE Study. Hence, 1,632.28 could be the temporary bottom until the outcome of the GE is known.

Besides, we also understand that there are ample capitals that need to be deployed back to the equity market as the local market has been suppressed due  to the GE uncertainty. This can be seen from the lagging performance of the FBMKLCI index in contrast to most of its regional and global peers. Under this gigantic short-squeeze scenario,  KLCI could also move up gradually to its all-time high of 1,700, which is seen as its ceiling level for now (3% below the consensus Index Target of 1,747).

What should investors do? Due to the various potential GE outcomes, we have drawn out the investment strategies to deal with the three likely scenarios below.

Ideally, we are looking for price corrections.Should they happen, we believe that investors should adopt a B.O.W. strategy on FBM100 index-linked stocks, preferably below or near 1,660, the mid-point of yesterday’s trading range and as it is also the index target as per our Top-Down Model.  As the downside seems to be well supported, we prefer more exposure now into the higher beta (in contrast to the all-weather and defensive) sectors i.e. (i) Banking, (ii) Non-bank Financials, (iii) Construction & Property as well as (iv) Oil & Gas. Furthermore, the high beta sectors/stocks are more effective in capitalising on any rebounds/rallies post-GE.

However,  should the local market prove to be resilient, latecomers could probably  consider laggards that have underperformed the FBMKLCI thus far. We believe these stocks should carry lower downside risks but at the same time offer catch-up plays. We have sorted out the FBM100 component stocks based on their YTD performance. Among the laggards here,  we prefer those with: (i) beta of >1 and (ii) positive (next year) earnings growth such as DIGI (OP, TP: RM5.30), DRBHCOM (MP, TP: RM2.70), HLBANK (MP, TP: RM15.20), PCHEM (OP, TP: RM6.86), SUPERMX (OP, TP: RM2.20), DIALOG (OP, TP: RM2.79) and AFG (MP, TP: RM4.00).

In a worst-case scenario,  should the market see strong price corrections post  the GE, we would recommend to bottom-fish the all-weather sectors such as (i) Education, (ii) Glove, (iii) Healthcare, (iv) REIT, (v) Telco, (vi) Utilities and (vii) Plantation if and when their prices approach their floor valuations (please refer to our 2Q13 Investment Strategy dated27 March 2013 for more details).

 

by Kenanga Research