Monday, June 08, 2009

Buying Momentum To Pick Up

Investors can expect buying momentum to pick up significantly in the weeks ahead, with oil & gas stocks the picks, says a research head

Bullish external leads - from China's manufacturing expansion for a third straight month to Australia's better-than-expected economic growth and surge in oil prices towards the US$70 a barrel mark - helped lift the local stock market to settle at a nine-month high last week.

The Kuala Lumpur Composite Index (KLCI) surged 31.4 points, or 3 per cent, last week to close at 1,075.5, the highest since September 9 last year, with strong gains in Maybank (+7.08 points), Genting Bhd (+3.71), BCHB (+2.61), Lafarge Cement (+2.47) and Axiata (+1.69), representing more than half of the index's rise. Average daily trading volume and value improved to 1.78 billion shares worth RM1.59 billion respectively, compared with 1.58 billion shares worth RM1.61 billion in the previous week.

Signs of waning pessimism are flashing across global economies and different asset classes. Key global and regional currencies have risen to near pre-crisis levels as funds move out of dollar-based assets to other high yielding investments. Equities and commodities in emerging markets, including Malaysia, are the beneficiaries. The impact from these external factors explains why the KLCI performed well last week during what is usually a quiet period.

On a positive note, last week saw many important economic indicators in the US signalling recessionary pressures are abating and a recovery is in motion, albeit at a slower pace, after the massive government spending, liquidity injection and monetary loosening. Personal income and personal spending rose more than expected, core inflation remained low at 0.3 per cent to accommodate prolonged monetary loosening, ISM manufacturing rose more than expected, pending home sales, construction spending and vehicle sales grew beyond expectations.

US job losses in May came in less than expected at 345,000 against a projected 520,000 and more than half the peak of 741,000 in January. Although the unemployment rate stood at 9.4 per cent, higher than the average forecast of 9.2 per cent, this lagging indicator is expected to peak above 10 per cent before trending down next year as economic recovery takes hold. US consumers are expected to loosen their purse strings as confidence improves although the latest report shows consumer credit fell at a 7.4 per cent annual rate.

Locally, the measures taken by the government so far are indicative of a strong resolve to break away from policies that led to inefficient use of resources and were stumbling blocks to achieving the country's long-term growth potential. The attempt to devise a new economic growth model that relies on high value-added products and services is positive.

On the corporate side, the recently concluded first-quarter 2009 earnings season showed a potential reversal in earnings momentum after four consecutive quarters of quarter-on-quarter contraction in earnings. Excluding MAS, net profit grew by 3 per cent quarter-on-quarter and cost pressure has abated with operating margin started trending upwards after three consecutive quarters of decline. These positive signs are expected to be more prevalent in the second half of 2009 and next year, lending credence to an earnings recovery story as indexed earnings are expected to grow by 15.1 per cent in 2010 after contracting by 6.4 per cent this year.

Thus, expect the huge liquidity and positive momentum on account of improving external economic climate, especially in the US, and strengthening corporate earnings to drive the KLCI to hit 1,200 by year-end based on a three-year average PER of 15.4x. Technically, do not discount the possibilities of it testing the 1997 high of 1,278.9.

Investors are advised to increase their exposure to oil and gas, construction, building material, gaming, infrastructure and high beta stocks to ride on the upside potential.

Technical outlook
The local stock market coat-tailed sharper rallies in the region last Monday after manufacturing in China surged for a third consecutive month in May, fuelling hopes that the worst of the global recession is over. The KLCI rose from an opening low of 1,047.62 to break out and close above 1,060 on that day. However, stocks gave back early gains the next day, as North Korea's plan to fire more medium-range missiles rattled investors. Consequently, the index dipped from a fresh eight-month high of 1,072.07.

The market extended losses mid-week, as further profit-taking offset the firm showing in the region on the back of a rebound in Australia's economic growth and stronger US home re-sales data, forcing the KLCI to close at the day's low of 1,055.40 on Wednesday. Nonetheless, buyers returned the next day to lift the index despite weaker regional markets. The local market ended the week on a high note after an overnight rebound on Wall Street.

The daily slow stochastics indicator for the KLCI is inching deeper into the overbought region following last Friday's sharp rally (Chart 1), but the weekly indicator hooked up and is set to trigger a buy signal at the extended bullish zone. The 14-day Relative Strength Index (RSI) meanwhile has just crossed above the bearish divergence downtrend line, which is a bullish breakout signal. The 14-week RSI however is just below the 70-point mark and is poised to rise into the overbought zone.

The daily Moving Average Convergence Divergence (MACD) trend indicator, however, has recovered with a hook-up to indicate a return in bullish momentum, while the bullish expansion on the weekly MACD signal line suggests a stronger uptrend ahead. Moreover, the +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator have again expanded positively, with the ADX line flashing a bullish reading of 41.1.

Conclusion
The bullish breakout above the bearish divergence declining line on the 14-day RSI last Friday is key to promote further upside momentum on the KLCI this week. More bullish signals from daily and weekly trend indicators will offset short-term overbought signals. Hence, investors can expect buying momentum to pick up significantly in the weeks ahead.

Sector-wise, our top pick remains the oil & gas space, with stocks such as Petra Perdana, SapuraCrest Dialog, Kencana, KNM, Perisai, Tanjung Offshore and Scomi Group anticipated to surge further and please investors who are overweight this sector. The key reason for this is the strong uptrend in crude oil prices. Plantation stocks such as IOI Corp and KLK should also perform as CPO prices play catch-up to crude oil given the more attractive and cheaper biodiesel alternative fuel.

As for the KLCI this week, a convincing breakout above 1,078, the 38.2 per cent Fibonacci Retracement (FR) of the bear run from the all-time high of 1,525 to the pivot low of 801, will fuel upside towards next resistance from 1,100, which is purely psychological. Looking ahead, even higher levels can be challenged in coming weeks, with 1,138, the 2.236X extension of wave A, as next upside target on a breakout above 1,100. On the downside, immediate support is revised higher to 1,065, with 1,055 and 1,045 acting as stronger support platforms.

Source: Business Times

1 comment:

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