10 March 2016 | Strategy
Follow the money
The long and the short of it
Syed Muhammed Kifni | [email protected]
KLCI: 1,686.35 points
2016 Year-end Target: 1,800 points
One of the basic equity investing strategies is to “follow the money”. In the longer-term, the word
‘money’ is almost invariably refers to the underlying corporate earnings, while in the shorter-term it
may mean the flow of liquidity.
SHORTER-TERM VIEW
Curious observations of foreign liquidity behavior… Empirical evidences suggest that foreigners tended to sell
on rumor, i.e. Taper Tantrum, but turned buyer/neutral on fact, i.e. Actual Taper. Thenceforth, it is notable that
foreigners were again selling on yet another rumor, i.e. Countdown to Rate Liftoff, hence they were anticipated to
turn buyer/neutral upon the fact, i.e. Actual Rate Liftoff.
Changes to Foreign Equity Net Purchases (since Jan-2011)
Source: Bursa, MIDFR
…which suggested near-term market support. As the actual rate liftoff took place in mid-December last year, a
repeat of past behavior should result in a fairly supported equity market during at least the first half of 2016. On this
score, the equity market began the year in a jittery mode attributable to the further slump in crude oil prices to below
USD30pb. However, the FBM KLCI made only a shallow retreat with good support seen at between 1,600 to 1,630
points and subsequently staged a gradual rebound and revisited the 1,700 points levels earlier this week.
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MIDF RESEARCH
Thursday, 10 March 2016
Foreign liquidity returning with sentiment buttressed by recovery in crude oil and Ringgit. It must be
highlighted that the gradual rebound in local equity prices coincided with the general returning of net inflow of foreign
liquidity since the final week of January this year and which also corresponded thenceforth with the improvement in
crude oil prices (from ~USD27pb to 40pb) as well as the relative strengthening of Ringgit against US Dollar (from
~USD/MYR4.40 to 4.10).
Source: Bursa, MIDFR
Technically, the market barometer is turning bullish as it broke above the 200-day moving average last week.
However, it is notable that a breakout price momentum would normally retest the breakout line as it encounters profit
taking activities before the next northward push. Hence we could be looking at the market undergoing consolidation
in the interim period with a prevailing resistance-turned-support level at ~1,675 points.
FBM KLCI: Price and 200-Day Moving Average
Source: Bloomberg, MIDFR
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MIDF RESEARCH
Thursday, 10 March 2016
LONGER-TERM VIEW
Earnings versus price. We reiterate our assertion that empirical observations between earnings and price are
conclusive with regard to the nature of their secular direct relationship. This is despite the ever present ‘noises’ from
short-term price volatility which is influenced by market sentiment and other situational issues. Hence our assessment
on the likely longer-term trend path of the FBM KLCI is highly dependent on the expected earnings growth
performance during the similar tenure.
Recovery in corporate earnings growth… On that score, it must be highlighted that the (Bloomberg) consensus
2016 FBM KLCI earnings growth is expected to return to a healthy level of 10.0% partly attributable to the low-base
effect from general earnings underperformance in 2015. The anticipated current year performance is in stark contrast
to the recent ‘earnings recession’ as attested by 2015 earnings growth of -12.1% as well 2014 and 2013 growth
figures of 1.9% and -5.0% respectively.
FBM KLCI historical and forward consensus earnings growth
EPS
YoY (%change)
CY2013
106.14
-5.05
CY2014
108.13
+1.88
CY2015
95.07
-12.08
CY2016(F)
104.57
+10.00
Source: Bloomberg, MIDFR
…with a reduced risk of forward earnings underperformance. Furthermore, we foresee a reduced risk of
material downward revisions in forward earnings estimates due to the already lowered expectation hurdles (with key
revenue and cost drivers as well as other assumptions pegged at quite pessimistic levels) pursuant to six consecutive
quarters of earnings disappointment up until 2QCY15. In this regard, it is notable that the two most recent results
quarters to 4QCY15 have produced aggregate results which met our expectations.
FBM KLCI: Earnings versus Price
Source: Bloomberg, MIDFR
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MIDF RESEARCH
Thursday, 10 March 2016
Macro outlook may restrict market downside. In addition, a bear market generally occurred in reaction to
drastic deterioration in the macro economic performance such during the 1998 crisis and 2008 economic downturn.
Hence, as the outlook for Malaysia's economy remains rather sanguine with (Bloomberg) consensus GDP growth for
this year expected at 4.4%, we do not foresee the equity market turning bear anytime soon. Having said that, we
remain mindful of intermittent cyclical pullbacks that may take place due to varied situational issues, even amidst
continued healthy macro growth.
Reiterate year-end 2016 FBM KLCI baseline target at 1,800 points. It is notable that FBM KLCI price
trajectory since 2013 mimicked the underlying flat to negative earnings performance. On that score, the anticipated
earnings growth recovery in 2016/17 may also see the benchmark similarly escaping the recent ‘price recession’.
Therefore, premised on the rooted behavior whereby earnings and price are trending broadly hand-in-hand, we
reiterate our 2016 FBM KLCI target at 1,800 points.
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MIDF RESEARCH
Thursday, 10 March 2016
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MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS
STOCK RECOMMENDATIONS
BUY
TRADING BUY
NEUTRAL
SELL
TRADING SELL
Total return is expected to be >15% over the next 12 months.
Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been
assigned due to positive newsflow.
Total return is expected to be between -15% and +15% over the next 12 months.
Total return is expected to be <-15% over the next 12 months.
Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been
assigned due to negative newsflow.
SECTOR RECOMMENDATIONS
POSITIVE
The sector is expected to outperform the overall market over the next 12 months.
NEUTRAL
The sector is to perform in line with the overall market over the next 12 months.
NEGATIVE
The sector is expected to underperform the overall market over the next 12 months.
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