Finding the gems

1. Market run. The KLCI has now risen by 16.8% for the year to date, mostly in the last five weeks, and the rise has been relatively broad based, with almost all sectors registering an improvement for the period. Even the outbreak of the Influenza A (H1N1) virus has not had any significant impact on the market’s climb.

2. Top performing sectors – the cyclicals. The top performing sectors in the KLCI were rubber gloves (+71.4%, although represented only by Top Glove), building materials (+49.7%), oil & gas (+41.9%), construction (+32.6%), tech (+37.8%), motor (+30.0%) and timber (+29.9%). Clearly the defensive sectors including consumer and insurance have lost out in the market run-up. And among the top performing sectors, other than the rubber gloves manufacturers which tend to be seen as defensive, the top performing sectors have also been the more cyclical sectors. This suggests a significant swing in terms of investors’ view of risk.

3. Laggards. Typically defensive sectors which have lagged the KLCI include telecom (+7.4%), consumer (-8.2%), while media (+14.1%), gaming (+17.9%) and infrastructure (+15.8%) have generally performed in line with the benchmark index.

4. Return of confidence managing to boost sentiment. The only thing that has changed appears to be investors’ confidence level, and this has pushed estimated 2009 PER for KLCI stocks under our coverage up by 3 multiple points to 16.1x currently vs. end-Mar. We are still looking at 15.3% contraction in earnings for this year and 14.8% growth in 2010 (stripping out the dilution from Axiata and Maybank rights issues).

5. Still value in large caps. Despite the run up in the market, we believe there is still value among the large caps. Three sectors which fit the bill are power (including two of our top picks TNB and Tanjong), banks (BCHB and AMMB) and gaming (Genting, Resorts World and B-Toto).

6. Hunting down value in mid caps. Market downturns tend to hit the mid caps hard, as they are less diversified and less liquid. In 2008, the bottom 50 stocks in the KLCI on average fell by 66.3% vs. the top 50 which fell by 32.8%. By comparison, the KLCI fell by 39.3%. However, as investors have begun to take on more risk, the mid caps are also proving to be an attractive hunting ground. For the year to date, the KLCI’s bottom 50 stocks have in fact outperformed the top 50. We believe there is still value among our Outperform-rated mid-caps including Parkson, CBIP, Hartalega, Kossan, Media Prima, YTL Cement, Sunway and Zelan.

7. Liquidity driven upsurge. Potentially, share prices could exceed our current fair values, as the liquidity surge drives valuations higher. We believe our forecasts are already very conservative, which suggests that our fair values are also base case estimates. Any pull back in the market would provide an opportunity to accumulate the better-rated fundamental stocks, including our top picks. Our trading picks will likely be more closely aligned with the direction of the liquidity flows, and for

now this still appears to be positive. (Refer T4)

Taken from

RHBinvest

Analyst: Yap Huey Chiang