Suggest Take Profit for Malaysian Market

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The KLCI shot directly up from 1,660 and we think that the recent volume could not justify the current rise. Other factors such as an over expanded MACD which would normalize once the range of gains decline on day to day basis.

The market sees passive selling from foreign funds when the ringgit weakened against the USD breaching RM 4 to the dollar earlier last month.

As Ringgit stabilized the selling stopped and sees some buybacks changing hands to local funds. Problem is the amount of buying in terms of volume remain weak.

We suggest you take profit on shares at target KLCI of 1,758.

Previously bought shares nearing 1,660 on the index could be shifted back to cash for the time being. Our recommendation earlier CIMB already saw a 4.5% gain from our target buy of RM 5.50.

You can de-risk index related counters and buy them back when the market dips again.

In the mean time, the 100 point rise seems un-natural and likely would see a correction underway.

 

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Maybank – Outlooks for 2H 2018

The ups and downs of KLCI had brought us down 5.86% for the 1st half of 2018 or down 6.62% year to do. The report below is somewhat similar to what we posted before the start of this year.

Maybank once again cover the outlook for the 2nd half of 2018 in these 100 pages worth of good reads. The coverage extends from world economy to Malaysia after Pakatan Harapan’s win over the general election.

Have a look! It’s a great read…

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CIMB’s Strategy June 2018

June is definitely a bear market but July just started which also marks the start of the 2nd half for 2018. Being down sharply for the last 2 months, we see possibilities for July to close higher than the 1st half.

CIMB posted its Malaysian strategy and it is clear that the weakest component on the KLCI I still the construction sector. Meanwhile, miners get a lift through higher oil prices.

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Furthermore, the report includes a very important chart where we see the correlation of foreign buying versus the value of Ringgit against the US Dollars.

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In short, weakening RM gets foreign funds selling. We missed the divergence for foreign money to come back after the election, but we believe that it takes time for confidence to rise and money to flow back in. The cabinet is in full force and business continues as usual.

CIMB only placed overweights on the oil and gas industry this time around.

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Take a look at their strategy report. A lot of information and data provided for your reference.

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CIMB Cuts KLCI Target

Cut KLCI earnings growth to 5% for 2018 and target to 1,767 pts

The weak corporate results have led us to cut our market earnings for the stocks in our universe by 6-7% for FY18-19, as we cut earnings forecasts for Axiata, Telekom and the banks.

This resulted in slower KLCI earnings growth of 5% for 2018 (from 8%) and 8% for 2019. In line with our earnings revision, we lower our end-2018 KLCI target to 1,767 from 1,820 points, still based on P/E of 15.4x (1 s.d. below three-year average mean P/E)

CIMB Research

Have a look at the summary after Q2 Results

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RHB – Assess The Impact of Project Cancellation

We always thought that the ECRL would be the first in line to be scrapped and never had the slightest fear that MRT3 would be scrapped. It seems though under Tun M’s leadership, anything could happen.

Anyway, here’s a report from RHB where the research house assesses the impact of project cancellation that would impact the local construction companies who got beaten down badly these few weeks.

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What We Would Love from The New Govt – Not Removing GST

We start of this series of request to the new government by addressing the GST issue where it is really contradicting to most Malaysians. Knowing that the manifesto by Pakatan Harapan proposes to remove the GST in the first 100 days, we think that going back to SST at 10% would see more inflationary pressures on day to day consumer products.

At the current moment, GST is an addition of 6% to goods but along the way in the middle of the supply chain, GST added inflationary pressure to a product. Meaning to cope with GST and its late refunds, normally people increase prices to cater for this delay.

Since there are many layers before the product reaches a shopper, these ‘added GST delay’ would increase the price of the good before even reaching the end user where the GST should be paid in full without refund.

But replacing it with SST might create adverse effects from the intention.

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Abolish & Implementing SST 10%

When a product rises in price, do you see the price going down? Businesses have overheads to cover and annual increase in salary is also decreasing their margins.

Just a simple scenario, when price of diesel went up, we see most people rising price of goods blaming high cost of transport. But when fuel prices declined from the RM2+ to RM1.80 we don’t see prices dropping.

A good example is those operating petrol stations complaining about loss in profits when oil price declined but kept quiet when oil rises. What a hippocrite…

To us, replacing the GST 6% with SST 10% would immediately see an immediate increase in inflation of 4% net off from the SST 10%. The GST implemented earlier had caused an irreversible effect to inflation of goods and services. With GST being abolished, these business operators would just stay quiet forgetting about the ‘added GST delays’ earlier and immediately realizes the opportunity to raise prices again.

SST would create tn opportunity for business operators changing the 6% GST to 10% of SST after its implemented. That is how we got the 4% instant inflationary gain. These  happened not because of what type of tax would be implemented but the nature operations by a business would take advantage when a loop hole appears.

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We really can’t allow those businesses to take advantage on the rakyat once more with a major change in tax on goods & services.

What We Think The New Government Can Do

(1) Rather than abolishing GST, the government should reduce it by up to 3%. Immediately this corrects inflationary pressures where the rakyat feels a relief on the 3% reduction and the government would still be able to collect revenue and buffer the loss in revenue by abolishment of the GST.

Slowly decreasing the GST rate year after year would see a softening impact to cushion consumer shocks and neglect businesses from taking opportunity with loop holes that are over-looked.

(2) To fulfill their manifesto, the government can re-introduced the SST at 6% or lower. The GST had turned into an ad-hoc tax after such a long time from implementation. The effects on middle chain margins adjustment had stabilized and we think that abolishing it would not affect the chain.

That is why only a lower tax rate on the end user would be able to relief the burden of the people.

(3) If really GST would be abolished and replaced by SST, we hope that the new government would take greater initiatives to curb on businesses who would leverage on this opportunity for profiteering. Good governance is also key in this issue and we wish that this transition is as smooth as possible.

Understanding Yields

Bloomberg deliberately show to us this chart where the yields a were nearing 2008 high when it was on the brink of the Global Financial Crisis. They love showing highly graphical pieces of data or charts that play with emotions telling you that something is brewing especially when markets are choppy.

They love to pass the message to you subliminally asking you to think for yourself what you should do during these choppy times. Therefore, being a well-informed investor is important where you should be able to identify these issues as noise in the markets.

Yield and Markets

Yields can be a sign of bad economy but also good economy.

When a country’s economy is bad for example when there was the recent scare in Russia on sanctions, we see yields spike due to the uncertainty and this the most common phenomenon of rising yields.

But at times when the economy is good, yields go up as well because there are just too many investors seeking the same pile of good stuff to put money into.

Selling in the stock market can happen concurrently when yields rise. We see in these couple of weeks because equity money makes its way into the bond market assuming that bond has more of a locked in gain and higher in terms of stability compared to equities.

For an investment manager, you could easily buy US$ 1 billion of bonds easily but not quite for equities as you would shake the counter by quite a bit.

Yields are A Funny Story

Yields somewhat possess the goldilocks behavior. It shouldn’t be too hot (high), too cold (low) but everything has to be just right. 3% on the 10-year yield for US Treasury is what many investment manager says a psychological barrier.

Take our MGS 10 year yield alone, the number was 3.5% during the 2016’s low and 4.2%  at the current moment. Obviously when 1MDB’s non-sense came out it spike to 4.4% which typically reflects fear and credibility for the Malaysian government.

Comparing that to what it is now, the economy had turned much stronger and the ringgit had stabilized. Investors are seeking MGS once again and even liquidating some equity assets to be placed into the bond market.

Yields at 2008 High?

We certainly think that the Bloomberg’s graphical was over-proposing that bad times are coming. The reason we are seeing this number and it’s not alarming that what it was in 2008 was indeed we are at different times.

Let it be QE’s money being released into the system and never being able to be recovered, the investment community as a whole are definitely twice as rich as are they were 10 years ago.

The amount of money in the system just proved to you that more capital is starting to get involved and more investors are gaining traction returning to the markets.

KLCI on The Way Breaking Previous High

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Well from all the choppy-ness in the markets we see KLCI strong and many might say it was due to election and stuff like that. There is a chance as historically KCLI outperforms the whole region prior to election.

The chart clearly shows that an ascending triangle is forming and the usual move is breaking the top eventually.

You could equip yourself with a bunch of blue chip KLCI stocks for a quick trade or so. Meanwhile in the small caps space, we see a massive correction from 17,000 and yet to see a bottom forming.