Local market has bottomed, immediate rebound highly probable — analysts
KUALA LUMPUR: The local market has reached its bottom and could only be heading upwards from now on, Kenanga Investment Bank Bhd’s research arm (Kenanga Research) projected.
After trending down from 1,770 to 1,780 levels, it believed that the local market has found a temporary bottom near the 1,660 to 1,650 levels in the second quarter of 2018 (2Q18) and will likely rebound in 3Q18.
While the third quarter (3Q) has usually been viewed as the weakest quarter, Kenanga Research guided that the seasonal pattern might not be applicable this year as the sharp decline in share prices in 2Q could probably hint of a frontloaded weak quarter.
“This is not impossible as the Muslim fasting month, Hari Raya Festival, and 2018 FIFA World Cup all took place in 2Q18,” it added.
As such, the research team opined that the local market could have bottomed out already and based on its Timing Model, it believed that an immediate rebound is highly probable.
“This is because the discount between FBM KLCI and its consensus target has dipped below 1,735-level or the negative two standard deviation level for the three-year band.
“Currently, The Discount is recorded at circa 12 per cent, which is far lower than the negative two SD-level of minus 10 per cent.
“Hence, the Index could have dipped into an ‘oversold’ territory as far as our Timing Model is concerned. A reversion back to the mean level would send the index back to 1,830 or +8 per cent from here,” it explained.
Based on the research arm’s Monte Carlo Simulation Study, it still expected high probabilities of the FBM KLCI trading between 1,750 and 1,800.
It also guided that the downside could be limited to 1,600 to 1,615.
Looking at market interest, Kenanga Research noted that the market interest is still uninspiring as both accumulated volume-price indicators of FBM KLCI and FBMSC have yet to cross above their respective 30-day SMA from below.
Nonetheless, it pointed out that there are some positive development as the accumulated volume price indicator of FBM70 has shown signs of reversal in selling momentum.
Should the indicator be able to stay above positive territory, Kenanga Research reckoned that investment and trading interest on mid-cap stocks should improve gradually.
It also noted that investors might stay side-lined or defensive while waiting for the release of the new Government’s 100-day progress report or the first Budget of the new government which is expected in November 2018.
Post 2Q18 results, Kenanga Research has lowered its earnings growth estimates for FBM KLCI in FY18 and 19 to 5.1 And 5.4 per cent due to earnings downgrades in plantations, telco and transportation and logistics sectors.
This is similar to consensus’ estimates of FY18 to 19 growth of 5.4 and 6.8 per cent.
“Due to our earnings and target price downgrades, and coupled with weaker investment sentiment, we have also revised our end-2018 index target lower to 1,900 from 1,950 a quartnting FY18E and FY19E PER of 16.1 and 15-fold,” it added.