AllianceDBS upbeat on local stocks, says uptrend to remain intact

PETALING JAYA: AllianceDBS Research, which raised its end-2017 target for the FBM KLCI from 1,750 points to 1,800 points, expects the market uptrend to remain intact despite news flow on geopolitical risks and dampened sentiment from the Bandar Malaysia setback.
“News flow on geopolitical risks emanating from North Korea, France and the US could trigger market pullbacks. Domestically, recent news flow on the setback in developing the iconic Bandar Malaysia project will dampen sentiment on the prospect of China-led infrastructure projects in Malaysia which may also spill over to the broader market.
“Nevertheless, we believe the market uptrend will remain intact as long as the corporate earnings growth trajectory stays in positive territory,” analyst Bernard Ching said in his monthly strategy report last Friday.
Ching said the improving exports outlook continues to be a bright spot for the Malaysian economy, with the Nikkei Malaysia Manufacturing Purchasing Managers’ Index turning positive in April 2017 with a reading of 50.7, the highest since February 2015.
“This is also reflected by the 26.5% year-on-year surge in gross exports in February 2017 amid broad base improvement in external demand,” he added.
While the electrical and electronic segment continues to be the bedrock of a resilient export performance, recent improvement in crude oil and crude palm oil prices have also helped in boosting overall exports.
“Against such a backdrop, the positive gross domestic product (GDP) growth momentum which started in 3Q16 may be sustained in the near term despite persistent weak consumer sentiment and consumption.
“Investors would be keenly monitoring the release of the 1Q17 GDP data on May 19 whereby consensus estimate of 4.0% growth looks conservative when compared to 4.5% growth in 4Q16,” said Ching.
He said the rebound in GDP growth trajectory coincides with the bottoming of corporate earnings downcycle.
AllianceDBS Research expects FBM KLCI earnings growth of 7.8% in FY17 compared with 4.3% in FY16 on the back of steadier commodity prices, firmer external demand and low base effect from kitchen-sinking exercises in 2016 for the banking and oil and gas sectors.
Ching said the FBM KLCI continued its good run from 1Q17 with a 1.6% gain in April, its fifth consecutive monthly gain.
“Small-mid cap stocks continued to steal the limelight as the FBM Small Cap Index gained 3.4% in April which brings its YTD gain to a staggering 21.2%. Buying interest of foreign institutional investors remained strong with net inflow of RM2.7 billion registered during the month,” he said.
In contrast, foreign holdings of government’s debt, which includes Malaysian Government Securities, have been on a downtrend since the central bank introduced measures to curb speculative activities on the ringgit via the non-deliverable forward market in November 2016.
AllianceDBS Research continues to overweight construction, gaming and utilities sectors while keeping automotive, building materials and telecommunication sectors at underweight. In terms of stock selection, it prefers cyclical to defensive stocks and favour those with clear earnings growth catalysts.
Its big-cap picks are Maybank, Genting and Gamuda while small-mid cap picks are BIMB, Sunway Construction, VS Industry, SKP Resources, Oldtown, Globetronics and Yong Tai. Top sells are BAT, FGV, Digi and Maxis given their stretched valuations and poor earnings outlook.