Despite various external uncertainties (i.e. U.S. interest rate direction, volatile crude oil price), we continue to favour theme plays in exporters and construction companies. Besides, we also prefer a more TRADING-oriented strategy under this RANGE-BOUND market condition. Apart from being more SELECTIVE, we also preferred a “Buy On Weakness” (B.O.W.) strategy, say <1,790. Our Top 10 Stock Picks for the quarter are COASTAL (OP; TP: RM3.43), HARTA (OP; TP: RM9.50), IJM (OP; TP: RM8.00), MITRA (TB, TP: RM2.37), MMCCORP (OP; TP: RM3.03), MPI (OP; TP: RM7.60), PHARMA (OP; TP: RM6.95), PMETAL (OP, TP: RM5.41), SPSETIA (OP; TP: RM3.95), VITROX (TB, TP: RM3.84).

Spot on for 1Q15. We accurately spotted a few underlying trends as highlighted in our last few strategy reports thus far. Recall that, we advised investors to downplay consumer sectors, especially retail subsegment, but to place more emphasis on GST beneficiaries as well as export-oriented plays that are least affected by GST implementation. We also reckoned that the construction sector would remain as one of the major growth engines despite lower oil revenue for government, especially for prioritised projects. In addition, in view of higher market volatility, we also advised investors to consider resilient sectors. Thus far, Pharmaceutical and Telco players have been doing well. Moreover, the trading strategy of bottom-fishing into heavily bashed down stocks, especially Oil & Gas, was proven right.

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.

Source: Kenanga