Updated: Thursday July 4, 2013 MYT 7:49:42 AM
Malaysian stock market correction expected

By LIZ LEE
lizlee@thestar.com.my
We advise investorsto sellwhen the composite indextrades at more than 1,810 but we prefer they buyon weaknessthan sell on strength. — CHAN KEN YEW

We advise investorsto sellwhen the composite indextrades at more than 1,810 but we prefer they buyon weaknessthan sell on strength. — CHAN KEN YEW

KUALA LUMPUR: The benchmark FBM KLCI may be due for a correction this quarter as valuations were not sustainable although the downside should be well-supported by strong liquidity in the banking system.

Kenanga Investment Bank Bhd research head Chan Ken Yew said the index was trading at a mere 3.5% discount to its consensus target of 1,840.

However, when the market does correct, he believes that the excess liquidity in the banking system, standing at RM317.9bil, will be able to cushion the selldown.

He said based on May numbers, the foreign fund outflow at RM4.2bil compared with RM18.8bil in total foreign net buying was “still very manageable.”

To add to that, the third quarter was typically a weaker season for the market as shown by past records and in the past five years, he said, adding: “We have seen corrections typically around August and September.”

That said, the research house added that it foresaw decent upside in the next twelve months.

Kenanga set its KLCI 12-month target at 1,870 and year-end target at 1,810.

“The upside is there and we see a correction as an opportunity to buy into weakness,” Chan said.

He added that timing was important and when the market hit 1,720, a 6% discount to market price, it would be a good time.

“We advise investors to sell when the composite index trades at more than 1,810 but we prefer they buy on weakness than sell on strength.”

Among the sectors Kenanga favours for the third quarter are building materials and construction as well as oil and gas.

Chan is cautious about property stocks, preferring developers that do not offer developer interest bearing scheme due to potential administrative measures in that respect.

“We also keep our mind open for the plantation sector as we suspect the crude palm oil prices could have bottomed out or still bottoming,” he said. “We will wait for strong signs of turnaround before we go aggressive on the sector.”

While the weakening of the ringgit against the US dollar should benefit export-oriented glove stocks, a stronger dollar also meant bleak days for airline operators as their interest expenses could hike up.

Chan’s other recommendation is to be selective on high-yielding stocks, with the exception of telco counters, during the quarter.

“We believe the consumer sector, especially the retail sub-segment, could be affected by the long-anticipated cut in subsidies and goods and services tax implementation.

Coupled with higher bond yield, he reckoned valuations of high-yielding stocks could be under pressure, like Malaysian real estate investment trusts.

Chan believed that the telco sector could be a dark horse, being a laggard-play.

“Although they still give good dividends, at least they are laggard as on a year-to-date basis, telco stocks are underperforming the KLCI by 8.7%.”

For more aggressive investors, Chan noted that they could consider stocks sold down by the recent foreign outflow.

A look at Kenanga’s top stock picks listed AirAsia Bhd, Asia Brands Bhd, Crest Builder Holdings Bhd, DiGi.com Bhd, Gamuda Bhd, IJM Plantations Bhd, Kossan Rubber Industries Bhd, Magnum Bhd, Muhibbah Engineering Bhd, SapuraKencana Petroleum Bhd and Tenaga Nasional Bhd.