FBM KLCI: 1,778.88 (2014 Year-end Target: 1,900 points)
RECAP OF OUR STATED VIEWS
In our Strategy note dated 8 January 2014,we offered the following views with regard to equity market direction this year, its downside range as well as potential event risks (which we deemed as not imminent) that may jeopardize our rather sanguine outlook:
“The FBM KLCI shall continue on its upward trajectory on favourable macro conditions. The FBM KLCI is expected to remain in the upper half of its secular upward trajectory during the next 12 months, supported by expectations of (i) gentler yet still robust domestic growth momentum, and (ii) brightening external economic conditions.
Potential downside would be limited to 1,750-1,700 points range. The largely favourable macro scenario shall limit the downside on the FBM KLCI to between 1,750-1,700 points range, beneath which resides the lower half of its secular trend channel. The lower half domain was last visited, albeit briefly, in 2H11 pursuant to the downgrade of US sovereign rating to AA+ by S&P as well as worsening sovereign debt situation in Europe.
…as major event risk is presently deemed as not imminent. Presently, we see no fundamental triggers for a revisit to the lower half of FBM KLCI secular trend channel. But then again, like in the past, the timing of the actual trigger can evade the scrutiny of the most seasoned market watchers. Furthermore, the list of the potential triggers can never be exhaustive, but some of the plausible suspects include (i) the breakdown of China’s shadow banking system (with attendant consequences on property prices and overall output growth), and (ii) massive currency (capital) flight particularly from countries suffering the twin (external and fiscal) deficits. However, at this juncture, we deem their probability of occurrence as low.”
REITERATE OUR STATED VIEWS
Events of last week not likely morph into major eventrisks.In spite of what had transpired during the past week, we opine that (i)the less than favourable China’s Flash Manufacturing PMI number does not signify that its economy is about to fall off the cliff (as our house view is that China would successfully avert an economic hard-landing this year), and (ii) the recent currency (capital) flight from countries suffering the twin (external and fiscal) deficits would not become out of control that it may result in a widespread contagion to other emerging market currencies.
Expect DJIA trend support to hold on favourable macro outlook. As for the DJIA, our trend analysis suggests a downside support at 15,000 points level with the market upward trend duly supported by US favourable macro trajectory.
Reiterate: Market lower bound remains at between 1,750-1,700 points range. We expect the FBM KLCI to remain in the upper half of its secular upward trajectory during the next 12 months (refer to Chart above). While we do not think the recent correction has played itself out just as yet, on the downside, we reiterate our view of the local benchmark support levels at between 1,750-1,700 points range.
Reiterate: Market upside may be capped by liquidity, earnings, monetary and valuation factors. While we do not expect a doomsday scenario to transpire this year, nor do we expect the FBM KLCI to repeat its rather stellar performance last year. We opine so on the premise that (i) the incessant albeit measured withdrawal of foreign liquidity (pursuant to the commencement of QE3 taper) to continue on in the months to come, (ii)relatively muted FBM KLCI earnings growth of circa 10% in 2014, (iii) expectation of a hike in the OPR, as well as (iv) Malaysia’s relatively weak albeit improving current account situation, may put a cap to the prevailing above-mean market valuation going forward.
NO CHANGE TO LIKELY PATH IN 2014
We reaffirm our FBM KLCI 2014 year-end target of 1,900 points. Hence, our rather modest FBM KLCI baseline 2014 year-end target of 1,900 points, with the upper and lower bounds at 1,980 points and 1,840 points respectively.
by MIDF (28th Jan 2014)