KUALA LUMPUR (Oct 6): Selective sectors such as aviation, glove and technology are expected to see earnings rebound in the quarters ahead, said AllianceDBS Research.
According to its head of research Bernard Ching, construction remains one of the domestic sectors with strong catalysts.
"We expect newsflow on the award of contracts for transport-related infrastructure projects such as MRT Line 2, the Sungai Besi-Ulu Klang Elevated Expressway (SUKE), the Damansara-Shah Alam Highway (DASH), LRT 3 and Pan Borneo Highway to pick up momentum. So far, several packages of MRT Line 2 and Pan Borneo Highway have been awarded," he said in his monthly strategy report today.
"The governments of Malaysia and Singapore have also recently signed a memorandum of understanding for the high speed rail project linking the capital cities of both nations, which should be ready by 2026. This bodes well for the construction sector which is expected to grow at faster pace than the headline gross domestic product (GDP)," Ching added.
Given the near-term headwinds and weak earnings prospects, AllianceDBS Research continues to advocate a defensive equity strategy.
"While maintaining our bottom-up derived FBM KLCI target of 1,700 points by end-2016, we advocate buying stocks with decent valuation and earnings rebound prospects. As such, we add Top Glove Corp Bhd and Inari Amertron Bhd into our top buys," said Ching.
Other top picks include Tenaga Nasional Bhd, Public Bank Bhd, Hong Leong Bank Bhd, Gamuda Bhd, SKP Resources Bhd, CapitaLand Malaysia Mall Trust and Sunway Construction Group Bhd.
AllianceDBS Research is maintaining its end-2016 KLCI target of 1,700 points, which implies 16 times 2017 price-earnings (PE). The KLCI is currently trading at 17.1 times and 15.6 times 2016/17 PE versus its historical mean of 15.4 times.
On Budget 2017, which is due to be announced on Oct 21, Ching said expectation is rising for a people- and market-friendly budget, ahead of the next general election.
"However, given the fiscal constraint, we expect the government to continue to exercise fiscal discipline while focusing on raising the disposable income of rural and lower income groups via direct subsidies. Meanwhile, fiscal spending will be channelled towards improving basic infrastructure in rural areas," he said.
"The government is also mulling over increasing the 30% cap on withdrawal of retirement savings in the Employees' Provident Fund for the purchase of affordable homes by first-time homebuyers. While these measures may boost sentiment, we do not believe they will significantly improve the fundamentals of the equity market," Ching added.