03 July 2012

RHBRI: Market Outlook & Strategy 2H2012

In our view, the equity market will likely be stuck in a range-bound trading pattern for now, but will likely trend up as global economic uncertainties clear out towards the later part of the year. Investors’ key worries include :

  1. worsening of the euro-debt crisis that remains unresolved
  2. fears of China’s and India’s economies crashing down into a hard landing; and
  3. the risk of US falling off the “fiscal cliff”.

External Volatility And Impending Election 2 Key Headwinds

On the home front, the major event to watch out for is the impending general election that could also create volatility to the local bourse given the uncertain election outcome. Nevertheless, we believe the market will eventually trend higher towards end-2012, premised on:
  1. the ECB making a more decisive move to mutualise the debts of Eurozone governments;
  2. China policymakers ease policies substantially and its economic growth re-accelerates;
  3. US Congressional leaders cobble together some deals to mitigate the impact from the “fiscal cliff” and allay the fear of its economy falling off the cliff; and
  4. domestically, the general election produces a result where the ruling coalition party remains in control of the government.

Meanwhile, global financial markets are still likely to be awash with liquidity as central banks in advance countries have pledged to maintain extremely loose monetary policy and could unveil more quantitative easing programmes to support economic growth should the situation warrant. 

On the home front, the economy is more resilient than feared and we expect real GDP growth to stage a modest rebound to 4.7% yoy in the 2H, from +4.4% estimated for the 1H. In the same vein, net EPS growth for the market is projected to recover to +10.8% in 2012 before moderating to +7.8% in 2013. Consequently, we are maintaining our end-2012 FBM KLCI target at 1,650 based on 14.6x 2013 earnings.

Given global macro headwinds and general eletion risks on the home front, we believe it pays for the more discerning investors to hold some defensive stocks that have strong cash flows to pay sustainable dividends in their portfolios. In addition, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market. Sector-wise, our key overweight are telecommunications, consumer and banking, although we also have an overweight stance on the utilities, gaming and semiconductor sectors.

Source: RHB Research Institute

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