FBM KLCI set to test all-time high

Axiata, Sime Darby, Petronas Chemicals and TM may appreciate further in the longer term while lower liners Hua Yang, Mah Sing, Time dotCom, UEM Land and DRB-HICOM should recover, says a head of research


Lower liners and small-cap stocks rebounded from consolidation last week after a two-week hibernation saw buyers accumulating on dips, while better-than-expectedfour quarter corporate earnings lifted selected blue chips to shore up the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) to a fresh eight-month high. The market was also encouraged by stronger economic data from the US and regionally, with a strong breakout rally sustaining in the last three days as European leaders agreed to accelerate the setting up of a permanent bailout fund.

For the week, the FBM KLCI climbed 25.01 points, or 1.6 per cent to 1,583.78, with Sime Darby (+38 sen), CIMB (+27 sen), YTL Corp (+28 sen) and DIGI.com (+13 sen) representing two-thirds of the index's gain. Average daily traded volume and value dwindled to 1.71 billion shares worth RM1.97 billion from 1.93 billion shares worth RM1.87 billion in the previous week.

While favourable news flows from Europe had a positive impact on the FBM KLCI, there is no doubt that the just concluded fourth quarter results season had a fair share in swaying the market direction. Normalised earnings for fourth quarter 2011 and 2011 grew by 11.7 per cent and 7.8 per cent year-on-year, thanks to strong performance from companies in the heavyweight sectors like banking and plantation. While banks' performance was underpinned by strong loan growth, higher income and lower allowances, plantation players benefited from higher crude palm oil prices. Resilient consumption bolstered earnings of telco, property and consumer sectors as well, which are deemed as proxies to domestic demand.

Notably, there is a shift in trend subsequent to the earnings season whereby stock upgrades surpassed downgrades, implying that valuation of many stocks has fallen to attractive levels and investor's expectations are low.

However, a similar parallel cannot be drawn for the top 30 blue chips as the FBM KLCI is not trading at a cheap multiple compared to its regional peers. Indonesia and Thailand, the emerging markets closes to us, offer better calendar year 2013 earnings growth prospects of 17.8 per cent and 14.9 per cent and trading at a relatively cheap price-to-earnings (PER) multiple of 11.5x and 10.7x respectively vs Malaysia's 12.2 per cent and 13.2x (based on Bloomberg consensus figures).

While Malaysia being a low beta market had only advanced by 2.5 per cent year-to-date, continued PER expansion in other regional markets on positive market undertone has the potential to rerate Malaysia as well. The impending announcement of various infrastructure and oil gas projects under the Economic Transformation Programme banner in the first half of this year could be strong drivers for the market apart from the listing of Felda Global Ventures that could draw fresh funds from abroad.

At the same time, expect powers at play (with more than 50 per cent market volume generated by government-linked funds) to hold the FBM KLCI intact until the dissolution of the parliament and potentially pushing it to test the all-time high of 1,597 soon. If the excitement builds up and volume kicks in, do not discount the possibility of the blue-chip index testing the 1,650 mark based on calendar year 2012 PER of 15x in the first half of the year. As a word of caution, this euphoria may not last. So, make use of this trading window for short-term manoeuvres while waiting for corrections for long-term investment decisions.

On the home front, Malaysia's trade numbers for January that will be released this week are expected to show weaker year-on-year growth compared to the previous month due to global slowdown. Bank Negara Malaysia, meanwhile, is expected to maintain the Overnight Policy Rate at 3.0 per cent during its policy meeting on Friday. On the same day, US will release closely followed non-farm payrolls numbers and unemployment rate.

Technical outlook

Shares on Bursa Malaysia retreated in line with regional weakness on Monday after crude oil prices climbed to a nine-month high and Moody's Investor Service said Greece is still at risk of default, encouraging investors to lock in gains. The FBM KLCI ended flat at 1,559.04 as losers beat gainers 455 to 327 on trade of 1.64 billion shares worth RM1.63 billion.

Stocks extended losses on follow-through profit-taking the next day, ignoring a regional rebound after crude oil dipped from nine-month highs and Chinese banks rose on a report that mainland regulators allowed them to extend loans to local governments for infrastructure projects. The FBM KLCI dipped to a low of 1,552.62 before closing down 2.31 points for the day at 1,556.73, as losers beat gainers 511 to 309 on moderate turnover of 1.73 billion shares worth RM1.59 billion.

Blue chips led rebound on the local market on Wednesday, spilling over to lift lower liners, boosted by the positive external tone after US consumer confidence jumped to a 12-month high and manufacturing output in Japan and South Korea rose. The FBM KLCI surged 12.92 points to close at 1,569.65, as gainers led losers 535 to 297 on improved trade totalling 1.94 billion shares worth RM2.69 billion.

Blue chips extended gains the following day, lifted by strength in Sime Darby, but lower liners fell in line with regional weakness on the absence of further measures to stimulate the US economy from the US Federal Reserve. The FBM KLCI added 3.8 points to settle at 1,573.45, off a high of 1,576.23, as losers beat gainers 506 to 309 on 1.61 billion shares worth RM2.02 billion.

Index heavyweights sustained a three-day breakout rally to lift the index up to a fresh eight-month high on Friday, fuelled by regional gains after US jobless claims fell and European leaders agreed to speed up setting a permanent bailout fund. The FBM KLCI climbed 10.33 points to settle at 1,583.78, off a high of 1,587.11, as gainers led losers 540 to 276 on turnover of 1.63 billion shares worth RM1.93 billion

The FBM KLCI's trading range last week expanded to 34.5 points, compared with 11.63 points previously, as investors chased blue chips such as Sime Darby and Petronas Chemiclas higher.

Due to last week's breakout rally, the daily slow stochastic indicator for the FBM KLCI flashed a buy signal and has climbed into the overbought region, while the weekly indicator re-hooked upwards in the highly overbought territory. The 14-day Relative Strength Index (RSI) indicator has also climbed up for a slightly overbought reading above 70, while the 14-week RSI improved its bullish reading above 60.

A buy signal was triggered on the daily Moving Average Convergence Divergence (MACD) trend indicator last Friday, while the weekly MACD continued to gain strength. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator have expanded against each other on an inclining ADX line, reinforcing the uptrend momentum.

Conclusion

While technical momentum for the index is now overbought following last week's breakout rally to an eight-month high, trend indicators signalled an uptrend resumption after a two-week profit-taking spell. As such, investors can expect further upside this week, with the benchmark index likely to challenge the all-time high of 1,597 seen last July. However, given that an accelerated rally will greatly increase overbought conditions, investors are advised to take profit towards 1,600 this week, ahead of a highly probable profit-taking dip following a breakout.

With the January 18 2011 pivot high of 1,576 taken out last Friday, next upside target to challenge would be the all-time high of 1,597, when the index will likely test uncharted territory in the coming weeks. As for the downside, immediate support is revised upwards to 1,566, the triangle congestion breakout level, followed by the February 16 pivot low of 1,549, with subsequent supports coming from the 30 and 50 day moving averages which are currently rising to 1,546 and 1,528 respectively, while the 200-day moving average now leveling at 1,503 will act as crucial support.

Stock-wise, blue chips such as Axiata, Sime Darby, Petronas Chemicals and TM may appreciate further in the longer term, while lower liners Hua Yang, Mah Sing, Time dotCom, UEM Land and DRB-HICOM should also recover given the limited downside risk and strong upside potential in the medium-term.

The subject expressed above is based purely on technical analyses and opinions of the writer. It is not a solicitation to buy or sell.