FBM KLCI may test record high

Anticipate AirAsia, CIMB, IOI Corp, Maybank and RHB Capital as good to buy on dips for longer-term upside, a head of research says


The local stock market extended its consolidation last week as lower liners were depressed with MAA Holdings and Muhibbah leading losses on negative news flow but blue chips again displayed upside resilience with the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) climbing to a five-month high before ending the week marginally higher.

Week-on-week, the FBM KLCI added 1.23 points, or 0.08 per cent, to end at 1,564.66, as gains in Genting Bhd (+38 sen), CIMB (+13 sen) and MISC (+17 sen) offset falls in Maybank (-12 sen), RHB Capital(-RM1.00) and Hong Leong Bank(-68 sen). Average daily volume and value rebounded to 920.4 million shares and RM1.53 billion respectively from 824 million shares and RM1.56 billion in the previous week, as bargain-hunting interest increased.

Last week's news of CIMB and Maybank backing off from the intention to merge with RHB Capital even without submitting a proposal was not a big surprise after the unexpected deal between Abu Dhabi Commercial Bank and its sister company Aabar Investments PJSC for the 25 per cent stake in RHB Capital set a higher benchmark price, which was deemed as not value accretive. With that, it is difficult for any contender to vie for the stake without paying higher than the 2.2x price-to-book forked out by Aabar as the changes in takeover code require 75 per cent approval from the shareholders either through equity or sale of assets and liabilities methods. Nonetheless, it is still not impossible to visualise a deal materialising in the future based on share swap method that provides an advantage to acquirers that trade at a premium to above price-to-book to valuation.

Trading at a CY11 price-to-book multiple of 1.75x, which is lower than the industry's average of 2.2x and mid-sized banks' 2.3x, the recent correction in RHB Capital's share price is a good opportunity to accumulate. Its net interest income is envisaged to register strong growth on the back of robust loan growth and higher net interest margin due to possibilities of more increases in Bank Negara Malaysia's Overnight Policy Rate (OPR). Further rate increases is not remote based on recent inflation indicators, like the Consumer Price Index (CPI) that rose 3.3 per cent year-on-year in May, which was on the dot with consensus projection. The margin is also expected to improve as the group starts to shift some focus from low yielding public sector loans.

We are at the tail end of first half of 2011 and expect window-dressing activities to lift the index to challenge the all-time of 1,576 later this week. There is no doubt that there will be some selling pressure today as the market reacts to the Dow Jones Industrial's 115-point correction to fall below 12,000 last Friday as worries about Greece defaulting on its debt lingered. Look out for current jitteriness to prevail throughout next two months as investors await more clues from the European debt crisis and the Federal Reserve's reaction (especially possibilities of a third quantitative easing) to the state of US economic recovery as more economic data trickles in.

On Thursday, Greek lawmakers will vote on ?78 billion (RM337.7 billion) of austerity measures and three days later the European finance chiefs will decide whether the indebted nation has met the conditions for its next aid payment. Across the Atlantic, the US Congress must approve a proposal to increase the nation's current borrowing limit of US$14.2 trillion (RM43.2 trillion) by August for it to borrow and service its debts. Otherwise, it will be in default.

On the back of ailing economic recovery and weakening commodity prices (as worries about economic woes spread and International Energy Agency's agreeing to release 60 million barrels of oil from emergency stockpiles) Ben Bernanke, the Federal Reserve chairman, may revisit his December admission that a QE3 is possible if the economy weakens and inflation pressures are subdued.

Slower-than-expected growth in the US and lingering sovereign debt issues in the US and Europe respectively are expected to drive back funds flow into emerging markets, which will benefit the FBM KLCI.

Bernanke's admission that the pace of economic growth in the US is less than expected and indication of a prolonged monetary easing in the country will work in favour of other regional currencies. So, seize any correction over the next two months to acquire fundamentally sound counters in the banking, oil and gas, construction, property and plantations sector. Players in the domestic oriented sectors will do well on the back a stronger ringgit and weaker US dollar. An inflationary environment bodes well for the property sector as well as investors switch from holding cash to real estate.

Technical outlook

Shares on Bursa Malaysia corrected on Monday, in line with weaker regional markets after the eurozone finance ministers failed to agree on a loan payout to spare Greece from default. Sentiment was further depressed after Credit Suisse cut its 2012 forecast for China's economic growth. The FBM KLCI lost 4.24 points to close at 1,559.19, off an early low of 1,557.52. Blue chips staged a mild recovery the following day, encouraged by regional gains as concern over a debt default by Greece faded, but the broader market was weaker, depressed by limit-down losses on MAA following the planned sale of its general insurance unit. At the close, the FBM KLCI was up 1.6 points at 1,560.79.

While lower liners stayed rangebound amid weak buying momentum on Wednesday, blue chips extended gains, encouraged by regional strength on optimism Greece will avert a debt default. The FBM KLCI ended 6.56 points up at the day's high of 1,567.35, helped by gains in Genting Bhd, CIMB and MISC. Stocks extended rangebound trade the next day, with blue chips dampened by regional weakness after the Fed reduced economic growth projections and China manufacturing slowed further. The FBM KLCI lost 4.16 points to settle at 1,563.19.

As expected, blue chips extended consolidation but rotational plays on lower liners picked up momentum given the strong regional rebound on hopes the Fed would provide further stimulus if economic data come in weaker-than-expected in the immediate term. At the end, the local benchmark index was up 1.47 points at 1,564.66, closing near session highs after trading within a narrow three-point range on healthy market breadth as 434 gainers led 286 losers on good volume totaling 1.07bn shares worth RM1.72bn.

Trading range for the FBM KLCI shrank to a narrow 9.83 points last week, compared with the 20.51-point range the previous week, as profit-taking and selling interest in blue chips capped upside.

The daily slow stochastics indicator for the FBM KLCI has climbed deep into the overbought region, suggesting limited upside bias, reinforced by the weekly indicator which also is grossly overbought with both readings above 90. However, both the 14-day and 14-week Relative Strength Index (RSI) indicators remained bullish with positive hook-up readings above the 60 mark.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) maintained a mildly bullish stance following the previous week's buy signal, reinforcing further the weekly MACD's buy signal. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator maintained their bullish expansions, with the ADX line slightly inclining to suggest a developing uptrend.

Conclusion

While trend indicators are improving their bullish signals, the daily and weekly slow stochastics suggest the FBM KLCI should encounter strong profit-taking resistance this week given their heavily overbought signals. Nonetheless, half-year window-dressing interest may still lift the index higher to challenge the all-time high by late week, prior to the anticipated profit-taking correction. Thus, any upswings should be viewed as a good selling on strength opportunity prior to a correction.

Chart wise, anticipate AirAsia, CIMB, IOI Corp, Maybank and RHB Capital as good to buy on dips for longer-term upside, while for lower liners, Malton, Muhibbah Engineering, Mulpha International, Kencana Petroelum and Perisai Petroleum are attractive to buy at cheaper levels for rebound profits.

As for the FBM KLCI, it needs to overcome 1,566, the May 31 peak, convincingly on strong buying momentum to accelerate towards the record high of 1,576.95 of January 6. A convincing breakout on close would lift the blue-chip benchmark index 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 is retained at 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.