Investment Strategy (Jan 2013):Defensive Neutral Aggressive (Domestic News-Flowand Election Theme PlayAmid Uncertainties Ahead – Europe’s Sovereign Debt Crisis, High Oil Prices & Inflationary Pressure, Slow US Growth Momentum While China Grapples With Inflationary Pressures and Slow Growth – Have Given Rise To Fears That Global Economy May Stall.
Sectors/Theme To Focus On (31 Dec– 04 Jan 2013)
The Malaysian equity market is expected to be characterized by higher volatility in 1HFY2013, trailing behind liquidity driven key regional bourses as investor caution heightens ahead of the 13th GE that is expected to be held in March 2013. Thereafter in 2QFY2013, foresee falling risk aversion post GE13 leading to a strong rebound.
In the case if BN retain a simple majority in parliament,assume a continued pace of mega project implementation, but post GE13 could also feature moderating economic growth and slowing consumption trends. This would stem from the resumption of the previously deferred energy and food subsidy reduction schedules and the absence of pre election fiscal packages.
Positively, continuing QE, particularly in the US and Japan, and optimism on a turnaround in Chinawill continue to fuels a near term liquidity driven global market, thereby limiting the KLCI’s downside.
Going into 2013, the return of growth is forcing portfolios to shift into growth stocks and cyclical stock markets. The second half of 2013 could see a re-rating of cyclical stocks as investors switched their focus back to macro and micro fundamentals post-GE.
Stock Market Leading Performance Indicator (31 Dec – 04 Jan 2013)
7 (0-3-Bearish 4-6-Neutral 7-10-Bullish)
Black Swan Events Or (Unpredictable) Risks/Surprises
1. Terrorist Attack -
2. Oil Supply Disruptions -
3. A Pandemic Disease –
4. Major Social And Geopolitical Upheaval -
5. Financial Shock– Eurozone Debt Crisis & Disintegration Of EU Bloc Countries
Events That May Have An Impact On Bursa MalaysiaBefore End 2012
1. The debt ceiling of the United States;
2. The American fiscal cliff in December 2012, which refers to the end of the so
called Bush tax cuts and will see the expiration of the payroll tax cut and the
implementation of automatic spending cuts, all of which begin in 2013;
3. Greeceexiting the eurozone. Nobody knows how the market will react to it but the
consensus is that the reaction will be of historic propotions;
Market Commentaries
Share prices are likely to continue their upward momentum in coming week supported by further window-dressing activities by fund managers as they prepare for another new year (2013).
With only one trading day left on Monday coming week for 2012, all eyes have been following closely on the movement of the FTSE Bursa Malaysia KLCI (FBM KLCI) to see whether the last day of the year (2012) will record another high after a record of 1,686.7 on last Friday.
With this momentum, the barometer index could hit 1,700 level during the first two weeks of January 2013 as the upward momentum builds up. However, the jump will not be as much, as banking stocks, which currently account for 35 per cent of total FBM KLCI's weightage, have not been moving that much despite being attractive.
Further buying interest in heavyweights, coupled with regional and world markets which were also on the rise despite concerns over the US' fiscal cliff, would drive the local bourse.
It is possible for the benchmark index to hit 1,700 or surpass that level if the positive momentum continues.
Moving forward, Bursabeing a laggard is temporary, as the Malaysian market will eventually start trending up when there is more clarity on the outcome of the GE. Unless the local funds' strong buying interest is back, our market will be range-bound prior to the GE, the timing of which is still subject to much speculation.
If the global economic outlook continues to improve and the regional markets sustain or keep the bullish trend, the Malaysian equities will become “the star”,provided there is no major surprises from the GE.
This is more so if the USis on track to economic recovery, having avoided the negative impact of the fiscal cliff and continues its quantitative easing policies.
China's new central committee is now (Dec 2012) focusing on lining-up its leadership personnel nationwide, but over the next few months from Dec 2012, focus may be shifted to economic policy action and stimulus to ensure its GDP for the next decade (2010s) doubles (or grows at a yearly rate higher than 7% over the next 10 years from 2012).
Emerging markets would definitely benefit from positive signs from the two world's biggest economies, which would lift corporate earnings, and hence the listed share prices.
My major concerns for 2013 are an unfavourable GE outcome (such as a smaller majority government), a full-blown EU crisis and high inflationary pressures caused by governments' “spending” or excessive quantitative easing.
Strategy For 1HFY2013 …
Recommends staying defensive in 1HFY2013 in the run up to GE13 with high yielding and low beta large caps being the most ideal hideout.
Generally avoid the illiquid small and mid caps.
Theoretically look for a) selective high dividend yield plays b) laggards with visible catalysts such as construction stocks c) selective ETP related beneficiaries and d) post GE13 beneficiaries and also mini themes include legalization of business trust framework which expedite capital management for some companies and opportunities in M&A and privatization.
Strategy For 2HFY2013 …
The second half of 2013 could see a re-rating of cyclical stocks as investors switched their focus back to macro and micro fundamentals post-GE. Although the outcome of the GE is anybody's guess and the market may still be affected by surprises' in the election results, fundamental play will return post GE 13 as investors will look past beyond politics and focus on macro and micro fundamentals.
Post GE13, position for buying up opportunities, particularly among laggards like Genting group and related companies which has historically done well post elections and Gamuda in anticipating of continued momentum in mega projects roll out (MRT Line 2 alignment). Key situational stocks include REIT themed beneficiaries like IJM Corp.
Technical Analysis
The bulls bounced back from the danger zone with a vengeance late Dec 2012 to give Bursathe fourth consecutive weekly gains. Based on the daily chart, the FBM KLCI had penetrated the previous record of 1,679.37 to establish a new all-time of 1,686.70 in early deals in last Friday.
Apparently, the major breakthrough was not accompanied by great volumes, but were not so concerned, as many big players were still on extended holidays. Hence, no matter how you look, it is a bullish breakout and the most important point is the bulls had somewhat removed the threat of a “double-top”reversal.
With more investors returning to the marketplace after the vacations and taking up fresh positions for the new year ahead (2013), they can expect the market to firm deeper into the uncharted territory going forward.
Technically, indicators are painting a promising pictogram, suggesting a steadier trend this week. If there is an absolute change in the sentiment, the culprit would be a breakdown in the budget talks, coming from the United States.
The immediate upside is to challenge the 1,700 points psychological level. Thereafter, resistance is expected at every 20 points or 30 points intervals. Current support is pegged at the ascending 14-day and 21-day simple moving averages, resting at the 1,659 points and 1,643 points respectively.
Correlation Between The Performance Of Stock Market Against GE Results
There is a low correlation between performance of stock market year to date (Dec 2012) against general election results.
Based on the results of the percentage of seats that the incumbent government BN won in the previous six GE in Malaysia and the performance of KLCI, there had been low correlation of only 0.4 between the performance of the stock market and the results of the GE.
Therefore we can summarize that the performance of the stock market does not have much bearing on the outcome of GE in so far as the BN is concerned. So the feel good wealth factor from the good stock market performance does not necessarily translate into a better GE performance for the incumbent BN government.
2008 was an isolated incident where a bad stock market performance preceded the worst outcome for BN since 1969.
However one outlier does not proof that a bad stocks market performance preceding a GE will lead to a bad GE result for the incumbent government BN.
How the stock market will perform in 1QFY2013 is debatable as the fund managers may want to re balance their portfolio from the high Beta stocks which are laden in the FBM KLCI 30 index weightage into the low Beta stocks such as plantation, oil and gas and consumer stocks which have less constituents in the FBM KLCI 30 index and therefore, this strategy may not push the FBM KLCI by much, but may either push it down or sideways.
Although a strong market performance may not affect the election results so much, a bad stock performance did reduce BN’s majority in 1990 and 2008.
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