2Q15 Investment Strategy - A Stock Picking Season
For the upcoming 2Q, we are NEUTRAL. While we believe prevailing uncertainties (GST
implementation, sovereign rating review, U.S. interest rate direction, oil price movement, etc.) will continue to overshadow market sentiment hence putting pressure on the local equity market, we also see two major events; namely the 11th Malaysia Plan (11MP) and Invest Malaysia conference (IM), to potentially give the local market a boost on potential positive news flows.
Meanwhile, the supportive domestic excess liquidity condition and improving investor sentiment should limit market downside. As for the so-called “Sell in May and Go Away” market saying, we reckon this may not be applicable, at least from FBMKLCI’s perspective. Based on our study, we did not see significant decline in both monthly total returns for the months of May and June since 2009. In fact, the 2Q had been contributing 12.4% to the full-year total return, on the average.
Having said that, the less attractive valuation of FBMKLCI could potentially cap the upside as well. Hence, we reckon that the local equity market could be trapped in a wide range-bound mode until we see more exciting catalysts. Our end-2015 Index target is pegged at 1,855 (vs. consensus: 1,860), implying ~20.0x and ~19.0x PERs to our FY15 and FY16 earnings estimates. This valuation is backed by FY15 and FY16 earnings growth estimates of 5.2% & 4.5%, respectively (vs.consensus’ 6.1% & 8.7%).
Our investment strategy remains unchanged. We will continue to focus on Theme Plays such as:
(i) exporters and (ii) construction companies. This is because we expect the trend of weak ringgit to remain and as such we continue to like export-oriented sectors (i.e. gloves makers, E&E players, OEM manufacturers). As their business nature is least impacted by GST, the export-oriented sector should continue to be in the limelight. On the other hand, the fact that PM is likely to reveal the 11MP in May, one should not down play potential news flows right up to the actual announcement.
Other strategies include: (i) choosing resilient & consistent performers, as well as (ii) specific stock picking.
Bullseye for 1Q15!
For the first three months of 2015, we rightfully spotted a few underlying trends that were
highlighted in our last few strategy reports. To recap, we see moderate growth of 5.1% in 2015 from 5.8% in 2014 due to: (i) high base effect, (ii) GST implementation, and (iii) lower crude oil price.
In our previous strategy report, we mentioned that the implementation of GST could potentially cause private consumption to scale back and even leading to cost-push inflation, to a certain extent. As such, we advised investors to downplay consumer sectors, especially retail sub-segment, but to place more emphasis on GST beneficiaries, i.e. MYEG (Not Rated), as well as export-oriented sectors (such as gloves makers, E&E players and OEM manufacturers) that are least affected by GST implementation.
Unlike other regional emerging economies that will benefit from lower oil prices, Malaysia will somewhat be negatively affected. The general perception is that lower oil price implies lower government oil revenue, hence weaker sovereign rating, which could eventually weaken ringgit against other regional and global currencies, especially the U.S. dollar. Prime Minister Dato' Sri Najib (PM) has also pointed out in the Revised 2015 Budget that the new fiscal deficit for 2015 is now estimated at 3.2% of GDP (vs. 3.0% previously) based on a new crude oil price assumption of USD55/barrel (vs. USD100/barrel previously). This is manageable as opposed to 2014’s fiscal deficit of 3.5%. The revised fiscal deficit is achievable via: (i) the reduction of government’s operating expenses, (ii) higher export growth, and (iii) potentially better-than-expected additional tax collection from GST. Without any fiscal measures, the sharp decline in oil prices would have brought the fiscal deficit to 3.9%. As such, concerns over the r in government’s oil revenue should ease henceforth.
Nonetheless, the depreciation of the Ringgit seems persistent. Apart from weaker fiscal position, the 1MDB saga and potential sovereign credit rating downgrade have resulted in the U.S. dollar continuing to strengthen against the Ringgit. The appreciation of U.S. dollar is also fuelled by Federal Reserve Chair Janet Yellen’s reiteration that a rate hike would come gradually.
With such expectations, we could see more aggressive foreign outflows (for both equity and fixed income markets).
On a positive note, we have capitalised this underlying trend with a strategy recommendation of focusing on export-oriented sectors. Moreover, owing to a potential slower private consumption growth post-GST implementation, we expect exports to become one of the most important drivers in 2015.
In our previous strategy report, we also reckoned that the construction sector to remain as one of the major growth engines despite lower oil revenue for government as prioritised projects were expected to be continued. True enough, PM has reiterated the original development expenditure (amounted to RM48.5b) plus some major projects such as MRT2, LRT3, HSR (Kuala Lumpur - Singapore High-Speed Rail) and reconstruction works for infrastructure damage after the recent floods. Hence, we reaffirm our view that the orderbook replenishment prospects for contractors in the near-to-medium term to remain bright.
Besides, in view of the higher market volatility, we had also advised investors to consider resilient sectors such as Telco, Sin, REIT, Power, Pharmaceutical and Consumer Staple Food sectors. Thus far, Pharmaceutical player such as PHARMA (OP, TP: RM6.95), one of our Top Picks back then, has been doing well apart from the above-mentioned sectors (see Figure 1 for details).
Please find out more of 2Q15 Investment Strategy from www.kenanga.com.my
For the upcoming 2Q, we are NEUTRAL. While we believe prevailing uncertainties (GST
implementation, sovereign rating review, U.S. interest rate direction, oil price movement, etc.) will continue to overshadow market sentiment hence putting pressure on the local equity market, we also see two major events; namely the 11th Malaysia Plan (11MP) and Invest Malaysia conference (IM), to potentially give the local market a boost on potential positive news flows.
Meanwhile, the supportive domestic excess liquidity condition and improving investor sentiment should limit market downside. As for the so-called “Sell in May and Go Away” market saying, we reckon this may not be applicable, at least from FBMKLCI’s perspective. Based on our study, we did not see significant decline in both monthly total returns for the months of May and June since 2009. In fact, the 2Q had been contributing 12.4% to the full-year total return, on the average.
Having said that, the less attractive valuation of FBMKLCI could potentially cap the upside as well. Hence, we reckon that the local equity market could be trapped in a wide range-bound mode until we see more exciting catalysts. Our end-2015 Index target is pegged at 1,855 (vs. consensus: 1,860), implying ~20.0x and ~19.0x PERs to our FY15 and FY16 earnings estimates. This valuation is backed by FY15 and FY16 earnings growth estimates of 5.2% & 4.5%, respectively (vs.consensus’ 6.1% & 8.7%).
Our investment strategy remains unchanged. We will continue to focus on Theme Plays such as:
(i) exporters and (ii) construction companies. This is because we expect the trend of weak ringgit to remain and as such we continue to like export-oriented sectors (i.e. gloves makers, E&E players, OEM manufacturers). As their business nature is least impacted by GST, the export-oriented sector should continue to be in the limelight. On the other hand, the fact that PM is likely to reveal the 11MP in May, one should not down play potential news flows right up to the actual announcement.
Other strategies include: (i) choosing resilient & consistent performers, as well as (ii) specific stock picking.
Bullseye for 1Q15!
For the first three months of 2015, we rightfully spotted a few underlying trends that were
highlighted in our last few strategy reports. To recap, we see moderate growth of 5.1% in 2015 from 5.8% in 2014 due to: (i) high base effect, (ii) GST implementation, and (iii) lower crude oil price.
In our previous strategy report, we mentioned that the implementation of GST could potentially cause private consumption to scale back and even leading to cost-push inflation, to a certain extent. As such, we advised investors to downplay consumer sectors, especially retail sub-segment, but to place more emphasis on GST beneficiaries, i.e. MYEG (Not Rated), as well as export-oriented sectors (such as gloves makers, E&E players and OEM manufacturers) that are least affected by GST implementation.
Unlike other regional emerging economies that will benefit from lower oil prices, Malaysia will somewhat be negatively affected. The general perception is that lower oil price implies lower government oil revenue, hence weaker sovereign rating, which could eventually weaken ringgit against other regional and global currencies, especially the U.S. dollar. Prime Minister Dato' Sri Najib (PM) has also pointed out in the Revised 2015 Budget that the new fiscal deficit for 2015 is now estimated at 3.2% of GDP (vs. 3.0% previously) based on a new crude oil price assumption of USD55/barrel (vs. USD100/barrel previously). This is manageable as opposed to 2014’s fiscal deficit of 3.5%. The revised fiscal deficit is achievable via: (i) the reduction of government’s operating expenses, (ii) higher export growth, and (iii) potentially better-than-expected additional tax collection from GST. Without any fiscal measures, the sharp decline in oil prices would have brought the fiscal deficit to 3.9%. As such, concerns over the r in government’s oil revenue should ease henceforth.
Nonetheless, the depreciation of the Ringgit seems persistent. Apart from weaker fiscal position, the 1MDB saga and potential sovereign credit rating downgrade have resulted in the U.S. dollar continuing to strengthen against the Ringgit. The appreciation of U.S. dollar is also fuelled by Federal Reserve Chair Janet Yellen’s reiteration that a rate hike would come gradually.
With such expectations, we could see more aggressive foreign outflows (for both equity and fixed income markets).
On a positive note, we have capitalised this underlying trend with a strategy recommendation of focusing on export-oriented sectors. Moreover, owing to a potential slower private consumption growth post-GST implementation, we expect exports to become one of the most important drivers in 2015.
In our previous strategy report, we also reckoned that the construction sector to remain as one of the major growth engines despite lower oil revenue for government as prioritised projects were expected to be continued. True enough, PM has reiterated the original development expenditure (amounted to RM48.5b) plus some major projects such as MRT2, LRT3, HSR (Kuala Lumpur - Singapore High-Speed Rail) and reconstruction works for infrastructure damage after the recent floods. Hence, we reaffirm our view that the orderbook replenishment prospects for contractors in the near-to-medium term to remain bright.
Besides, in view of the higher market volatility, we had also advised investors to consider resilient sectors such as Telco, Sin, REIT, Power, Pharmaceutical and Consumer Staple Food sectors. Thus far, Pharmaceutical player such as PHARMA (OP, TP: RM6.95), one of our Top Picks back then, has been doing well apart from the above-mentioned sectors (see Figure 1 for details).
Please find out more of 2Q15 Investment Strategy from www.kenanga.com.my
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