Our view remains unchanged. We firmly believe that the expectations of US Fed further raising its benchmark discount rate will continue to cause high volatility in capital flows across global capital markets. Nevertheless, our decent index target of 1,755 still implies >6% potential gains from the current level. In addition, as we see no immediate earnings and price re-rating catalysts amid relatively high valuations as per the historical PER band, the local equity market is likely to be trapped in a sideways or range-bound trading mode. We continue to advocate a range trading strategy with a Buy On Weakness (B.O.W.) if and when the index dips below 1,620 and Sell On Strength (S.O.S.) as it approaches 1,710 and beyond. Our index target of 1,755 implies FY16E/FY17F PERs of 19.4x/17.9x on the back of our FY16E/FY17F earnings growth estimates of 3.9%/8.1%.

Despite the fair numbers of Neutral sectors and limited Overweight sectors, we generally preferred to stick with defensive/resilient sectors (such as Telco, Power, Pharmaceutical, Gloves, Education and F&B). We also like selective export-oriented companies (Tech & Semicon, Plastic & Packaging, as well as Gloves) due to relatively high probability of hiking interest rate in US, hence, weakening of regional currencies that will boost exports. Besides, we also believe that export-driven manufacturers are the long-term beneficiaries of TTPA due to increased market access. We are also cautiously optimistic about the Construction sector despite concerns over potential delay in certain mega projects in the government’s efforts to achieve the targeted fiscal deficit. However, it is our view that the government may prioritize its resources but projects for public interest, such as public transportations, will still be continued. However, unlike previous quarters, when we were looking for higher yielding stocks such as Gaming & MREIT sectors, we have turned more cautious in yield stocks as the recent hike in Fed’s interest rate could signal the beginning of a series of interest rate hikes. In a rising interest rate environment, bond-like equity investment is likely to see de-rating due to: (i) narrower interest differential and (ii) higher required discount rate for valuation purposes.

Timing-wise, we aim to Buy On Weakness (B.O.W.) if and when the index dips below 1,620 and Sell On Strength (S.O.S.) as it approaches 1,710 and beyond. 1Q16 Top Picks. After taking all the above-mentioned factors into consideration, coupled with input from analysts, we select: (i) ARMADA (OP; TP: RM1.17), (ii) KIMLUN (OP; TP: RM2.05), (iii) OLDTOWN (OP; TP: RM1.76), (iv) PESTECH (OP; TP: RM7.43), (v) PHARMA (OP; TP: RM6.95), (vi) SKPRES (OP; TP: RM1.76), (vii) TAANN (OP; TP: RM5.70), (viii) TENAGA (OP; TP: RM15.42), (ix) TM (OP; TP: RM7.33) and (x) TOPGLOV (OP; TP: RM14.20) as Top Picks for the current quarter.

Source: Kenanga Research - 5 Jan 2016