FBM KLCI to trend higher

Lower liners counters like DRB-HICOM, Muhibbah Engineering, KNM Group, Perisai Petroleum and SapuraCrest Petroleum are very attractive to accumulate at current levels for longer-term upside, says a head of research.


Shares on Bursa Malaysia rebounded from an early sell-off last week, as improving economic data from the US offset investor concern over higher possibility of a Greek debt default, which rocked European stock markets. Concern that higher inflationary pressures and more monetary tightening measures in China would force regional central banks to raise interest rates also contributed to the cautious market undertone last week.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed a gain of 7.24 points, or 0.47 per cent, last week to settle at 1,563.43, with Maybank (+22 sen), Axiata (+19 sen) and Petronas Gas (+RM1.14) contributing to most of the index's rise. Average daily traded volume and value recovered to 824 million shares and RM1.56 billion respectively, compared with 734.7 million shares and RM1.32 billion in the previous week, due to the increased presence of bargain hunters.

A fairly strong rebound on the last trading day of the week lifted the FBM KLCI from negative territory to end on a positive note for the five days' trading. Much of it was attributed to a spillover effect from the US markets that turned a little optimistic after jobless claims fell less than expected last week, housing starts for May rose more than forecast, permits for future construction touched a five-month high and retail sales declined less than estimates. It helped sidetrack worries about Greece debt crisis for a while.

In the absence of any immediate term domestic catalysts, the FBM KLCI will continue to take its cue from external markets for direction. While US existing and new home sales numbers that will be released this week will be closely followed, investors' main attention would be on the Federal Open Market Committee meeting tomorrow and Wednesday for clues on US policymakers' next move after the second quantitative easing expires this month. Signs of continuation in any other forms should suppress the US dollar and lead to an increase in commodity prices and attraction in emerging markets and vice versa.

Apart from that, investors could view positively the news that German Chancellor Angela Merkel has relented on her stance that bondholders should shoulder the burden of the Greek debt as it would be a step in the right direction to resolve the Greek debt crisis soon and amicably. As coming news from the global front is expected to pacify some of the major concerns that been affecting investors and work in favour of emerging markets, anticipate the benchmark index to trend higher this week.

On the domestic front, news that Abu Dhabi has committed RM18 billion to develop aluminium-related industries in Sarawak and reiterated its commitment to set up the Kuala Lumpur international financial district worth some RM25 billion may rekindle interest in Sarawak-related counters (like CMS, Naim and Hock Seng Lee) and local construction players. That aside, talk that Lembaga Angkatan Tentera has been awarded a RM2.8 billion contract to build a new base for the Royal Malaysian Air Force in Sendayan, Negri Sembilan, based on direct negotiation could create speculative interest in Boustead Holdings and TRC Synergy.

Interest in Boustead is a no brainer as it is a 59.3 per cent subsidiary of LTAT with exposure in the property business. TRC, on its part, has good rapport with the Malaysian armed forces and has been awarded close to RM900 million worth of contracts before to build the Bentong prison, Sepanggar Bay submarine facility and a maritime training centre. With a sizeable order book of RM1.19 billion that could last two years, strong exposure in Sarawak, net cash position with a healthy balance sheet and undemanding calendar year 12 PER multiple of 10x, it is not surprising if it attracts attention based on the news flow.

Technical outlook

On the Bursa Malaysia Derivatives index futures market, spot month June rose 4.5 points, or 0.3 per cent, week-on-week to 1,555.5, deteriorating to a 7.9-point discount to the cash index, compared with the 5.2-point discount the previous Friday, as bears still dominated the futures market and bulls remained weak and unconvinced given lack of positive local leads and external noises.

Shares on Bursa Malaysia closed weak on Monday, depressed by the negative external tone from concerns over slowing global economic recovery and accelerating inflation in the region. The FBM KLCI lost 10.31 points to settle at the day's low of 1,545.88. Stocks staged a mild rebound the following day, but gains were checked by concern over slowing growth after China reported inflation that rose 5.5 per cent in May and increased banks' reserve requirement ratio by 0.5 per cent. The FBM KLCI rose 2.63 points to close at 1,548.51, off an early low of 1,543.56.

The local market extended its recovery on Wednesday, with the FBM KLCI lifted by gains in Tenaga (+17 sen), Petronas Gas (+38 sen) and Petronas Chemicals (+12 sen), while lower liners attracted more bargain-hunting interest. The index gained 7.68 points to end at the day's high of 1,556.19 on better turnover of 888.7 million shares worth RM1.6 billion. The market stumbled the next day, in line with weak regional markets amid concerns over weakening US economy and potential debt default by Greece, but ended off lows supported by mild bargain-hunting interest. The benchmark index ended down 1.95 points but at the day's high of 1,554.24.

Stocks bounced back on Friday following the overnight rebound on Wall Street, encouraged by improving economic data which offset concern over a potential debt default by Greece. Late buying interest in Maybank, Axiata and Petronas Gas lifted the index to close 9.19 points higher at 1,563.43, as gainers edged losers 394 to 345 on stronger volume of 946.2 million shares worth an impressive RM2.22 billion.

Trading range for the FBM KLCI expanded to 20.51 points last week, compared with the 10.23-point range the previous week, as buying interest in blue chips increased tempo.

Among other indices, the FBM-EMAS Index added 25.84 points, or 0.24 per cent, to 10,739.46, but the FBM-Small Cap Index retreated 87.66 points, or 0.7 per cent, to 12,666.27, reversing the previous week's gain, as small cap stocks suffered mild profit-taking pressure.

A buy signal was triggered on the daily slow stochastics indicator for the FBM KLCI early last week, and is currently rising to indicate further upside potential this week. The weekly indicator stayed positive but is now mildly overbought. Both the 14-day and 14-week Relative Strength Index (RSI) indicators are showing positive hook-ups, suggesting a bullish bias for the index.

Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator flashed a fresh buy signal, strengthened by the weekly MACD which also just crossed for a buy signal. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator registered a bullish expansion, but the ADX line is levelling, suggesting a stronger rebound is crucial to sustain the uptrend.

Conclusion

Multiple buy signals from the daily slow stochastics, daily and weekly MACD trend indicators suggest that the FBM KLCI should ascend this week, encouraged further by improvement in the external market environment following stronger US economic data and belief that the European Central Bank would support a Greek debt restructuring and prevent default contagion. On the local front, any increase in announcements and updates on Economic Transformation Programme projects would be a booster to market sentiment.

Chart-wise, top blue-chip picks for this week are AMMB Holdings, Axiata, CIMB, Genting Malaysia and Maybank while for lower liners counters like DRB-HICOM, Muhibbah Engineering, KNM Group, Perisai Petroleum and SapuraCrest Petroleum are very attractive to accumulate at current levels for longer-term upside.

As for the FBM KLCI, it must overcome immediate resistance from 1,566, the May 31 peak, to boost upside momentum towards the record high of 1,576.95 of January 6. A decisive breakout on close would lift the benchmark to target 1,586 and 1,599, the respective 61.8 per cent and 76.4 per cent Fibonacci Projection (FP) of the 1,532 high of November 10 2010 to the 1,474 low of November 29 last year. Immediate support meanwhile is adjusted higher to 1,552, which is the 76.4 per cent Fibonacci Retracement (FR) of the 1,576.95 record high of January 6 to the 1,474 pivot low of February 28, followed by 1,537, the 61.8 per cent FR and next at 1,525, the 50 per cent FR.