While the market has been performing stronger than expected, fundamentals have remained largely unchanged. As such, we believe the recent market rally could be sentiment and liquidity driven. Various analyses have shown that the underlying uptrend in FBMKLCI remains intact, but risk of a short-term correction is heightening. As such, we prefer to stick to our B.O.W. strategy, if and when the index pull back to 1,705/1,670, and to focus on our Overweight sectors or Outperform rated stocks, especially laggards. For 2Q17, we have selected: (i) HLBANK (OP, TP: RM14.75), (ii) IOIPG (OP, TP: RM2.30), (iii) NOTION (OP, TP: RM1.62), (iv) PIE (OP, TP: RM2.87), (v) SCGM (OP, TP: RM4.48), (vi) SKPETRO (OP, TP: RM2.09), (vii) SLP (OP, TP: RM3.18), (viii) SUNSURIA (OP, TP: RM1.61), (ix) TENAGA (OP, TP: RM17.50), (x) TM (OP, TP: RM7.03) and (xi) TOPGLOV (OP, TP: RM5.92) as our top picks.

So far so good, but ... Market has been much stronger than expected. Apart from seeing spill-over effects from the strong regional and global markets, the return of foreign investors to the local equity market in a more aggressive way is a pleasant surprise. Despite such exciting and encouraging signs, we believe the underlying fundamentals have not changed much. Besides, domestic liquidity remains tight, as the excess liquidity in the banking system remains low at ~RM160bn. Post 4QCY16 results reporting season and after some house-keeping adjustments in our earnings estimates, we are still looking at flat-to-negative FY17E/FY18E net earnings growth estimates of -0.3%/-0.5% vis-a-vis consensus estimates of 2.0%/6.4%.

Trend is your friend, but ... As such, we strongly believe that the recent upswing is sentiment/liquidity driven. Among the “Feel-Good” factors are: (i) the forthcoming 14th Malaysian General Election (GE14), (ii) improving global economy especially the US, and (iii) the return of foreign capital.

We have quantified Market Sentiment, by measuring the Premium/(Discount) of Fwd. PER of FBMSC (or FBM70) vs. FBMKLCI. Thus far, we observed that the discount of Fwd. PER of FBMSC against FBMKLCI is starting to stage a pullback after tested the +2SD-level. The Fwd. PER of FBM70, on the other hand, is also traded at a premium and the valuation had way surpassed its +2SD-level, suggesting market sentiment could be overheating. Hence, short-term pullbacks are likely.

To track Market Liquidity, we have developed a new study called “The Accumulated Volume-Price Study” (AVPS). The study clearly shows that then underlying Buying Interest remains intact. Therefore, trend-following should be a better investment strategy for now. However, upside from here could be getting limited as: (i) valuations of small-and-mid-cap stocks are catching-up fast, and (ii) the discount between consensus target and FBMKLCI is currently between +1SD and +2SD levels, which could suggest a toppish FBMKLCI.

Higher target, but prefer B.O.W.. In line with consensus and to account for stronger sentiment we have revised up our end-2017 index target to 1,775 (from 1,750 earlier). At 1,775, it implies ~16.6x/16.7x to our FY17E/FY18E earnings estimates. Consensus index target is also revised up from 1,735 a quarter ago to ~1,780 currently. As upside seems unexciting from here coupled with heightening risk of price correction, we prefer to start positioning if and when market pull backs towards 1,705/1,670, which we believe these are ideal "Buy on Weakness" (B.O.W.) levels.

As for sector/stock selections, we shall now focus on our Overweight sectors or Outperform rated stocks, especially laggards. We like (i) Aviation, (ii) Gloves, (iii) Plastic Packaging, (iv) Power Utilities, (v) Property, and (vi) Technology sectors. NOTION and PIE are proxies for Technology sector. SCGM and SLP are Top Picks for Plastic Packaging sector. SUNSURIA is an alpha-play for our tactical OVERWEIGHT call for Property sector. We also select IOIPG and TOPGLOV for laggard play apart from proxies to Property and Glove sectors, while TENAGA being the laggard pick for the Power Utilities sector. SKPETRO and TM are also picked as laggard plays while HLBANK will act as a proxy to the revival of foreign interest in banking sector in additional to its undemanding valuation.

Source: Kenanga Research - 27 Mar 2017