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Wednesday, October 22, 2014

Volatility on Bursa Malaysia to continue, focus on mid-caps


KUALA LUMPUR: Volatility in global markets including Bursa Malaysia is expected to continue as the external economic and financial fundamentals dictate investor sentiment.
The FBM KLCI chalked up a combined 30 points last Friday and Monday, giving investors a glimmer of hope, but this saw foreign funds taking the opportunity to reduce their shareholdings in Malaysian equities.
Hence the KLCI retreated on Tuesday as investors were worried about the sustainability of the rally.
MIDF Equity Research said as at Oct 17 year-to-date, foreign funds were net sellers at RM3.8bil, erasing more than the RM3bil in net inflows in 2013.
However, UOB Kay Hian Malaysia Research does not see all is doom and gloom and advocates investors seize trading opportunities as the market recovers from the last two weeks of fall-off.
“We remain positive that ample domestic liquidity will still reward selective mid caps with good absolute returns through 2015,” it says in its strategy note. 
MIDF Equity Research head Zulkifli Hamzah tells StarBiz investors should buy on dips the stocks that fulfil their requirements, taking into account inherent earnings quality, good earnings growth potential, and/or attractive valuation.
The underlying secular trend of the equity market is expected to remain upward sloping, he says.
"The market can never be immune to intermittent cyclical pullback. However, do not overreact to its occurrence as it is essentially a manifestation that market expectation may have exceeded the unfolding reality. Thus the prevailing valuation needs to be corrected," he explains.
On the FBM KLCI's performance, MIDF Research’s current year-end target of 1,900 seem lofty under the present circumstances, but he believes this target may only be delayed by about three to six months.
"Nevertheless, we expect the KLCI to end the year at above the psychological level of 1,800," he said.
He says the recent equity market downswing started on Wall Street, arguably in reaction to a small cut in the International Monetary Fund global growth outlook for 2015.
As for UOB Kay Hian Research, looking beyond the anticipated year-end upward trend, the market will gradually de-rate to mean valuations in 2015 as various challenges crystalise on both the economic and capital market fronts.
“Although we advocate being defensive over time, there are trading opportunities as the market recovers from the last two weeks of fall-off. We remain positive that ample domestic liquidity will still reward selective mid caps with good absolute returns through 2015,” it says. 
However, the research house points out that valuations are going back to the “old normal” as market dynamics weaken.
“Beyond our anticipated domestic liquidity-driven year-end uptrend, we expect the KLCI to trade mostly at its mean price-to-earnings (PE) in 2015 as the following economic challenges impact investor sentiment – softer crude oil prices in 2015, domestic inflation in particularly 1H15 and rising interest rate expectations in 2H15 (end of quantitative easing programmes could reduce foreign ownership of Malaysian bonds),” it says.
UOB Kay Hian Research points out softer crude oil prices, which moderately worsen government deficit, coupled with domestic inflation (going against a global deflationary environment) suggest the ringgit would remain weak. 
“While we would avoid concept stocks, still ample market liquidity and the lack of cheap large caps should allow selected mid caps to deliver good capital gains through 2015, although the pool of such companies with decent earnings growth visibility would be smaller.  
“Meanwhile, our financial screen reveals trading opportunities. While our valuation review shows that most sectors are still not compelling relative to their mean PEs, some investment-worthy mid caps have retraced significantly,” it adds.
Meanwhile, another analyst says the current global bearish market sentiment will definitely not spare any markets. The KLCI had been trying very hard to maintain at the 1,800 range after sliding from an all-time high of 1,896 in mid-July.
However, he says it would not be good to remain in a long term invested position in the equity market, unless the investor has a very strong reason to it, or has a very solid sets of proven trading strategies, coupled with a huge war chest of cash.
"For those who had a higher risk appetite and would still want to hunt out in the equity market, I would recommend to seek those companies with upcoming or on-going corporate exercise, while keeping an eye for a good bargain on companies that is debt free, or without significant borrowings, which would also be a good option as well," he adds.
Investing in gold would be good as the current price is quite low and has not been speculated for a period of time after the selldown from a peak of US$1,900 per ounce in September 2011, he says.
"With much sell down in equities market, and with the near zero interest rate in US, the option are high for the huge money to be parked into gold or bonds," he adds.
Meanwhile, JF Apex Research is more cautious and advises those to liquidate their position to preserve capital/minimise losses or lock in profit, especially on those small-and-mid cap stocks, and wait for clearer market direction to re-enter the market.
"We view the current selldown as temporary and minor correction, hence market shall rebound towards year-end. However, any gains (seasonally being a good quarter driven by window dressing) shall be capped by weak external sentiment," it said.
JF Apex Research has also cut its year-end KLCI target to 1,870 and advises investors to stay on the sidelines at this moment.
"For long-horizon investors who wish to bottom fish at this moment, they could look a stocks and/or sectors with underlying strong fundamental ssuch as tech, property and construction.
"Also, rendering decent yields on telco, gaming and reit stocks. They could also park their investments in safe-haven asset such as bonds at this moment," JF Apex Research adds.

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