KUALA LUMPUR (Jan 2): JF Apex Securities Research has revised downwards its end-2015 target for the FBM KLCI to 1,720 points from 1,930 previously, saying the local stock market will continue to exhibit choppy trade as long as crude oil price stays sluggish and the ringgit continues to weaken against the US dollar.
In a strategy note Jan 2, the research house said foreign selling would re-emerge whenever there was a concern on the slump in oil price which could trigger the country’s fiscal budget and current account deficits.
“As oil price might need 3-6 months to stabilise and find its equilibrium,as shale oil prelude the ‘new chapter’ of oil supply, we expect the local bourse to stay volatile with a downward bias in 1H15,” it said.
JF Apex said that following the recent major correction to 1670-1690 points, the FBM KLCI is now trading at 15.9x 2014 PE and 14.6x 2015 PE as compared to 16.6x 2014 PE and 15.2x 2015 PE on July 14.
“We deem current valuation reasonable but is yet to be attractive as the FBM KLCI is now trading at +0.5 standard deviation above its historical mean of 15x for current PE and –0.25 standard deviation below its mean for forward PE,” it said.
The research house foresees the domestic economic outlook for 2015 to remain challenging as tumbling oil prices could derail the government’s budget deficit target of 3% of GDP for 2015 (based on oil price of US$100/barrel under government projection).
This is because reduction in government coffers may outweigh the savings on subsidies, since oil revenue make up 30% of national income and the soon-to-be-implemented GST is yet to contribute significantly to total revenue in 2015, it said.
“Furthermore, the shrinking current account surplus would continue and possibly turn into deficit in the coming months, no thanks to the slump in commodities' prices.
“Hence, our concern on downgrade of sovereign credit rating will expedite the outflow of foreign funds from our bond and equity markets,” it said.
JF Apex also foresees a slew of downside risks which could derail its "still positive" view on the equity market or even trigger a "bear market", in light of the following developments:
a) spillover effect of Russia’s crisis and geopolitical tensions re-emerging in Ukraine
b) exodus of foreign funds from emerging markets due to depreciation of Asian currencies
c) sharper-than-expected fall in China's economic growth
d) doubtful economic recovery of Japan and EU which relate to the effectiveness of Abenomics and ECB’s monetary stimulus
e) significant slowdown in domestic GDP growth as a result of decline in export and local consumption coupled with possible downgrade of sovereign rating pursuant to a "twin deficit.
JF Apex said investors should adopt a combination of defensive and active investment strategy by investing in undervalued stocks, either small cap or mid and large cap stocks, with positive newsflow and brighter earnings prospects, in addition to the high yield stocks with resilient business models which are unfazed by the downturn in economic growth.
It is recommending this instead of a passive investment strategy as it believes the key component index-linked counters such as banking, telco, plantation, oil and gas (O&G) currently lacked positive leads to drive the index higher.
“Overweight on construction. We continue to see a flux of contract awards as highlighted under Budget 2015 and upcoming announcement of 11th Malaysia Plan in May/June to excite the construction sector.
“Downgrade oil & gas to 'marketweight' but ‘still’ positive on selected stocks. For O&G sector, despite recent slump in share prices and Petronas’ capex reduction by 15%-20%, we deem the current valuations attractive as earnings are still backed by healthy orderbook in relation to earlier bagged contracts,” it said.
However, JF Apex said it was selective on stock picks with preference for mid and large cap stocks which could withstand weakening oil price, development in brownfield and full-fledged players with business exposures ranging from upstream, midstream to downstream.
Elswhere, JF Apex said it was “neutral” with positive bias on rubber glove and telco sectors, and “neutral” with negative bias on automotive, consumer, plantation and property sectors.
The research house said its top picks were IJM Corporation Bhd (TP: RM7.66), Gadang Holdings Bhd (TP: RM2.57), SapuraKencana Petroleum Bhd (TP: RM4.19), Pantech Holdings Bhd (TP:RM1.14), Top Glove Corporation Bhd (TP; RM5.35), Genting Plantations Bhd (TP: RM11.40), LBS Bina Group Bhd (TP: RM2.03) and QL Resources Bhd (TP; RM3.90).