FBM KLCI Outlook For 2H2011

History beckons for our Malaysian bourse as we enter the second half of the year. Continuing from where it left off at the end of the second quarter, the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) is poised to chart new frontiers ahead, probably peaking inside our 2011 technical forecast range of 1,730-1,780 (an upside potential of 10%-13%).

The key market barometer finished slightly higher in 2Q11 (up 33.9-point or 2.2%), adding to 1Q11’s tiny gain of 26.2-point or 1.7%. This took its year-to-date return to 4.0%, the second best performance across the region. Among the 11 Asian stock exchanges tracked by us:

1. The Philippines (+5.8% q-o-q) and Indonesia (+5.7% q-o-q) were the better performing markets during 2Q11 while China shares listed in Hong Kong (-5.6% q-o-q) and Hong Kong (-4.8% q-o-q) were the lousiest; and
2. Indonesia (+5.0% since end- 10) and Korea (+2.4%) came in top of the list when measured on a year-to-date basis while India (-8.1%) and Japan (-4.0%) gave the worst returns so far this year.

Over on Wall Street, major U.S. share indices posted changes of:
(a) minus 0.4% to 0.8% in 2Q11; and
(b) 4.5% to 7.2% in 1H11.

Essentially, overseas equities – following their strong performances last year – are now facing headwinds from macro matters. The list of fear factors include:
(a) the imposition of additional tightening measures to combat inflation;
(b) rising inflationary expectations;
(c) double-dip recession threat in the major economies;
(d) volatility in the commodity / currency markets;
(e) sovereign debt crisis fallouts; and
(f) abrupt liquidity withdrawals from the world’s financial system.

Yet, should investors be able to climb over the wall of worries then better days may just lie ahead of us. From a fundamental perspective, we can look forward to favorable themes like:

1. a sustained global economic recovery;
2. positive corporate earnings momentum;
3. Ringgit strength for incremental currency returns;
4. progress in the implementation of the government’s Economic Transformation Programme or ETP. (An update of the ETP is scheduled on 5 Jul and an official launch of the mega MRT infrastructure project will be held on 8 Jul); and
5. upbeat stock market expectations in the run-up to a possible snap general elections.

Amid the wobbly external backdrop, Malaysia could appeal to foreign investors as an under-owned defensive market, even though current CY12 P/E multiple of 14x ranks at the upper end of the regional valuation range (and somewhere in the middle of its historical band). Just like what happened in 2Q11 when foreigners were net buyers of RM6.0b worth of securities, reversing a net selling figure of RM3.4b in 1Q11.

In the most recent month of Jun, Bursa Malaysia statistics revealed that overseas investors bought more shares then they sold – equivalent to an amount of RM3.2b (up from +RM1.6b in May). The streak of three straight months of net buying during the quarter would have raised marginally the foreign ownership in our local bourse, which stood at 21.4% of overall market capitalization as of end-Mar 11.

In contrast, domestic institutional funds remained as net sellers in Jun (of a sum of RM1.9b versus –RM1.3b in May). This consequently brought the cumulative net selling to RM4.4b in 2Q11, versus 1Q11’s net buying of RM5.7b. Meanwhile, local retail investors were evenly matched in terms of buying and selling between Apr and May this year before turning net sellers in Jun (of a net value of RM0.8b versus -RM0.3b in 1Q11).

Technically speaking, we see more upside potential than downside risk in the near to medium term. Our own trading system – which runs on embedded formulas driven by technical indicators and filters with its reliability and validity back-tested using statistical techniques – is predicting an uptrend for the FBM KLCI. To pass a pre-set 20% decision rule in our program, when a buy alert appears on the chart, the FBM KLCI must climb 20% or more (as measured from the trigger point) to be counted as one bullish trade. Or else, should the index drop by at least 20% it would be considered a false signal, whichever comes first. Chart 1 (a) – (c) depicts a sequence of buy signals between 2000 and 2010 – with 37 out of 38 times (representing a 97% hit rate) correctly forecasted a minimum increase of 20%.

While no new alert has appeared in the second quarter, the outstanding buy signals from No 39 to No 43 – assuming they would eventually pass our test rule by a minimum margin of 20% – indicate that the benchmark index remains on a bullish track with a potential to reach at least 1,778 and 1,822 (see Chart 1(d)).
A reverse application of our trading system is to mark support zones by setting horizontal lines at 20% below the signal points. In doing so, buy signals from No 39 to No 43 on Chart 1(d) – if they stick to our rule of not plunging by more than 20% first – imply that the index is expected to find major support at the 1,185-1,215 zone should there be any sharp pullbacks.

Meanwhile, an analysis on the chart patterns and other technical indicators also reveals no visible signs of a trend reversal yet (Chart 2). We therefore reaffirm our bullish technical stance for our Malaysian bourse with the benchmark FBM KLCI – riding on an extended rally that started from a trough of 836 in mid-Mar 2009 – set to break new grounds ahead as it charts its way to peak inside our 2011 technical projection range of 1,730-1,780. Our major support lines to cushion any intermittent market corrections are pegged at 1,390 (first) and 1,305 (second), respectively.