KL external factors may exert pressure

Despite weaker-than-expected US jobs growth, rising China inflation and fading stimulus prospects in the US and China, the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to bounce back from lows and end higher last week on local fund buying support on select index heavyweights.


For the four-day week, the FBM KLCI added another 4.25 points, or 0.27 per cent to 1,603.12, with Axiata (+8 sen), Tenaga (+12 sen), IOI Corp (+7 sen) and Genting Bhd (+12 sen) representing most of the index's gain.

Average daily traded volume and value shrank further to 1.16 billion shares worth RM1.48 billion respectively, compared to the 1.28 billion shares and RM1.24 billion average the previous week, as trading activity slowed amid cautious investor sentiment and the King's coronation holiday.

External factors could exert downside pressure on the benchmark index this week as concerns grow over the sustainability of economic growth in the US and state of economic affairs in China and Europe. Cooling labour market and rising applications for unemployment benefit had already affected US consumer confidence in April.

To add, China's slower than expected first quarter 2012 gross domestic product (GDP) of 8.1 per cent, announced last Friday, reduced many investors in the US to quivering wrecks and pushed the S&P 500 lower to its worst weekly performance since mid-December.

It appears that this is just the beginning and investors may have to acknowledge the eventuality that economic growth in China may dip below eight per cent this quarter as the government engineers a slowdown to achieve a lower growth of 7.5 per cent this year while keeping inflation in check.

Based on its faster than expected March CPI of 3.6 per cent, likelihood of China cutting interest rates appears remote for now but it may adjust lower its high reserve requirement ratio of 20.5 per cent to accommodate credit expansion.

On a separate note, its decision last Saturday to double the yuan's trading band against the US dollar to one per cent is in the right direction to allow more flexibility in market forces determining the equilibrium for the yuan and reducing global trade imbalances.

If Spanish bond yields continue to rise surpassing the current six per cent and move closer to a seven per cent level that prompted Greece, Ireland and Portugal to seek bailouts, it could send investors globally into a reminiscent mood and the long streak of losses seen in European markets in recent weeks could spread to the rest before the European Central Bank comes to the rescue.

Locally, buying support from government-linked funds may help to keep any corrections at bay this week. Positive news flows with regards to the Economic Transformation Programme could provide some buying support with the project delivery partner for Klang Valley My Rapid Transit announcing that awards for two viaduct guideway construction packages (V1 under bumiputra category and V4 under open category) would be announced soon. This may invite some speculative interest.

With about 90 projects related to Sungai Buloh-Kajang line expected to be announced by mid-2012, construction players are expected to be busy over the next few years.

Point to note is that while many of them are trading at a double digit CY12 PER and above their book value, Naim Holdings is still trading at a cheap single digit PER of 7x and 30 per cent discount to its book value. In fact, excluding its 34 per cent stake in Dayang that's worth about 82 per cent of its market capitalisation, market is attaching less than 2x PER for its construction and property businesses.

As Naim is one of the contenders for MRT projects under the bumiputra category and originate from Sarawak the huge disparity in valuation seems unjustified. It deserves a second look as it has RM825 million of orderbook that would be complemented by its RM2 bilion tenderbook should it win some of the MRT packages.

Technical outlook

However, spot month April's FBM KLCI futures traded on the Bursa Malaysia Derivatives Berhad lost 0.1 per cent to close at 1,594.5 last Friday, widening to a 8.62-point discount to the cash index, compared to the 2.87-point discount the previous week, as traders were unconvinced by the strength witnessed on the cash index.

The local stock market fell in line with regional losses on Monday, as the weaker-than-expected US employment report raised concerns over recovery potential and China's inflation increased.

The benchmark index fell 7.59 points to 1,591.28, off an early low of 1,588.58, as losers beat gainers by 468 to 238 on slow trade totaling 1.08 billion shares worth RM1.08 billion. Stocks staged a rebound the next day due to stronger February export numbers, ignoring the regional slump on concerns over fading stimulus prospects in the US and China, weak US jobs growth and rising inflation in China.

The key index regained 5.89 points to settle at 1,597.17, as gainers edged losers 365 to 332 on turnover of 1.1 billion shares worth RM1.57 billion.

On Wednesday, the local market was closed for a public holiday due to the King's coronation.

Stocks extended gains on cautious trade Thursday, boosted by optimism in the region over improving economic data and better earnings prospects amid higher commodity prices.

The local bourse added 4.1 points to close at 1,601.27, as losers edged gainers 366 to 360 on flat trading volume totaling 1.1 billion shares worth RM1.6 billion.

Stocks were mildly steadier on Friday, as earlier gains were checked by profit-taking after China's slower-than-expected first-quarter GDP growth of 8.1 per cent offset optimism from China bank lending which surged in March to the most in a year. The index was up 1.85 points to 1,603.12, off a high of 1,604.71 at the close, as gainers led losers 400 to 325 on higher trade totaling 1.35 billion shares worth RM1.66 billion.

The trading range for the index measured 17.72 points last week, compared with the 19.06-point range the previous week. For the week, the FBM-EMAS Index rose another 0.28 per cent to 10,994.37, while the FBM-Small Cap Index rose another 0.52 per cent to 12,560.83.

The daily slow stochastic indicator for the FBM KLCI hooked up to trigger a buy signal at the upper bullish zone, but the weekly indicator leveled at the grossly overbought region after the previous week's sell signal.

The 14-day Relative Strength Index (RSI) has improved to a reading at 62.19, while the 14-week RSI appreciated mildly to read 67.40.

Meanwhile, the signal line on the daily Moving Average Convergence Divergence (MACD) trend indicator continued leveling to suggest range trading mode, but the weekly MACD continued to signal strength ahead. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator expanded on a level ADX line, suggesting a weak uptrend mode.

Conclusion

Despite a daily stochastic buy signal, most other technical momentum indicators for the index registered mixed to weaker readings, suggesting a correction is likely this week. Moreover, weaker-than-expected economic numbers from the US due to weak jobs growth in March, drop in consumer confidence and more than forecast jobless claims did not augur well for growth in the US, hence increasing correction potential.

Additional worries in Asia after China's economy expanded by 8.1 per cent in the first quarter, the slowest pace since 2009, could exert further downward pressure for the local market this week.

A breakdown of the FBM KLCI immediate support from the 10-day moving average at 1,599 will grease downside to better supports from the 30- and 50-day moving averages which are rising to 1,586 and 1,574 respectively.

Stronger support reinforcement remains at the February 16 pivot low of 1,549, while immediate resistance would be the recent April 3 record high of 1,609.33. Next stronger hurdle is at 1,620.

Chartwise, blue chips such as AirAsia, Axiata, CIMB, Genting Bhd, RHB Capital and TM are only attractive to buy on further weakness to stronger support levels for rebound ahead. Meanwhile, lower liners such as DRB-HICOM, MRCB, Dialog Group, Perisai and Perdana Petroleum would also be good buys on further dips for technical rebound gains going forward.

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