Friday, June 17, 2011

FBM KLCI Trading Strategy: Deflated But Not Punctured

FBM KLCI Target – 1,720
June 17, 2011

Less sanguine on 2011 GDP
# Given the recent weak external data (possibly from temporary “Japan disruption”) and Apr IPI as well as delay in ETP projects, we have turned less sanguine about
Malaysia’s GDP. We now expect 2011 GDP to be 4.8% rather than 5.5%.

# However, due to the push-back of ETP impact (which is expected to pick up pace next year) and sustained world growth of 4.4% (IMF forecast), we expect Malaysia GDP to accelerate to 5.5% in 2012.

# More importantly, private consumption remains intact as wealth creation has culminated in sustained spending by the middle- and high-income group.

# We remained positive given that the cut in our 2011 GDP was mainly externally driven (especially developed nations) while the delayed impact of ETP is purely a timing issue. Moreover, 2012 GDP is expected to accelerate to 5.5% while the “Japan disruption” is expected to be temporary.

# Sectors that could be affected are technology, glove, manufacturing and auto. However, the overall impact on the market is muted given that the combined market cap of technology, glove and auto is only 2.98% of total market cap. As for the manufacturing sector, the market cap contribution is only 1.41% (but bulk of these companies’ prospects is still domestically driven).

# Delay in ETP project is purely a timing issue as we expect it to pick up momentum in 2012. Moreover, construction stocks that HLIB has Buy ratings (HSL, Mudajaya and
WCT) all have existing order book to sustain earnings while implementation of the MRT project implies potential of more contracts and boon to future earnings.

# Petronas higher capex is another domestic driver.

# Continued domestic consumption will benefit sectors like auto (albeit supply chain disruption), low cost carriers (proliferation of regional travelling), banking, construction (building properties on top of ETP projects), consumer discretionary, services (medical and education), property and telcos.

# End of QE2 to create more volatility.

# Domestic – fiscal position, rising interest rate and SRR beyond expectations and General Election.

# External – inflation, geopolitical, China over tightening, lingering European debt woes, weak external economic data and faster-than-expected pace of QE unwinding.

KLCI Target
# Remained positive with unchanged year-end FBM KLCI target of 1,720 (15x 2012 earnings).

# Short term sideways trading and increase volatility arising from unpredictable external factors and end of QE2. Any pull back is opportunity to accumulate fundamentally strong stocks at lower valuations.

Source: HLIB Research

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