RHBRI Market Outlook & Strategy 4Q2012: Stormier Outlook

RHB research institute (RHBRI) is of the view that it could still be a choppy few months for the equity market in the 4Q given weakening economic fundamentals in the major world economies and fears of an imminent general election on the home front. Whilst more rounds of quantitative easing have been unveiled in the developed world, the big question in investors’ minds is how all these quantitative easing measures will translate to better global economic outlook. Having said that, equity still stands up vis-a-vis the unappealing returns of the alternative asset classes, such as cash and bonds and any good news is still likely to prompt a rally in equities.

How was Malaysia fared?

And, what's the strategy now?

Thus far, Malaysia has fared relatively well in the global financial crisis, and this is partly on account of low reliance on foreign funding of its banking system and more importantly, the progress in the implementation of the Economic Transformation Programme to boost domestic demand and cushion the economy against the downside risk from the external sector. As a result, the economy has bucked the trend and its real GDP growth is projected to pick up to +5.4% in 2013, from +5.0% estimated for 2012. This will translate to sustained earnings growth of around 6.0% in 2013 to create new shareholders’ values for investors.

We believe after a phase of correction and consolidation, the market will come back as the huge bond purchase programmes in the Eurozone and the US will push investors out of low-yielding cash and bonds over time into riskier assets such as equities. As the general election could be delayed to March 2013, our end-2012 FBM KLCI target remains unchanged at 1,690. Assuming global situations stabilize in six to nine months time and the global economic recovery is intact, our end-2013 FBM KLCI target is 1,815, based on 15x 2014 earnings.

Whilst our core strategy remains defensive, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market. In addition, as the search for yield will likely remain a key driver for both retail and institutional investors in the 4Q, high divided-yielding stocks will also continue to outperform the market, in our view. Sector-wise, our key overweight are telecommunications and banking, although we also have an overweight stance on the utilities and healthcare sectors.

Source: RHBRI research report

RHBRI 4Q12 Market Strategy: Stay Defensive And Buy On Dips To Outperform The Market

Given the persistent headwinds from the external sector and general election overhang on the home front, we are of the view that the market will likely be stuck in a range-bound trading pattern in the 4Q. Consequently, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market, while staying defensive on the core holdings will provide greater stability to the portfolio performance.

In addition, as the search for yield will likely remain a key driver for both retail and institutional investors in the 4Q, high divided-yielding stocks will also continue to outperform the market, in our view. A list of our top picks is reflected in table below, which includes “buy on weakness” tactical stocks.

Which Sector to look at?

Sector-wise, our key overweights are telecommunications and banking, although we also have an overweight stance on the consumer, utilities, gaming and rubber gloves under the healthcare sector (see table below). We expect the high-yielding telecommunications stocks to remain relatively defensive for equity investors under the current market environment.

The banking sector, on the other hand, carries a 34.7% weighting in the bellwether index and, in our view, cannot be ignored, given the better-than-expected recovery in earnings momentum over the last two consecutive quarters. The year-to-date annualized loan growth stood at 11.9%, ahead of our and the consensus forecasts of 10-11% and 8-9% and the pipeline of corporate deals remains healthy. This suggests that banking earnings could continue to surpass expectations in the quarters ahead, which coupled with decent valuations and dividend yields vis-a-vis the FBM KLCI benchmark, would bode well for share price performance in the 4Q, in our view.

Source: RHBRI research report

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

RHBInvest: Now you can TRADE and FLY

Other than competitive brokerage fees, brokerage firms are battle it all out to gain market share by dishing out all kind of freebies. Those who did not make the move would definitely lose their market share to other competitors. Last year, we noticed that many brokerage firms were competing in fees charged. But, RHB investment bank has their own way - RHBInvest HOTTIE Rewards programme.

Let your investment take you on Vacation!!!

Under the programme, every broking transaction done on RHB's online share trading platform (RHBInvest) will be rewarded with loyalty points. Every RM1 spent on brokerage fees will earn 1 HOTTIE point and every HOTTIE point can be converted to 500 BIG points from AirAsia's BIG Loyalty global reward programme.

The accumulated BIG points can be redeemed for AirAsia's seats and for shopping at 1,500 BIG's associated partners and online merchants worldwide.

"We expect an improvement in participation. Most brokers are competing with real estate investment trusts and customer loyalty is waning. The idea of the reward programme is not to compete on price but to give more to clients from their brokerage," said RHB Investment Bank's head of equities broking.

Click here for more info on the reward programme

Source: RHBInvest

RHBRI: Market Outlook & Strategy 2Q2012

More Signs of Recovery

The tail risk from the euro-debt crisis has subsided after ECB opens its liquidity floodgates. Elsewhere, more signs of economic stabilization and recovery have emerged, particularly in the US. As the global economic recovery gains momentum, external demand for Malaysia’s exports will likely improve as the year progresses.

Domestically, consumer spending remains resilient, which will be reinforced by the progress in the implementation of the Economic Transformation Programme to sustain growth. We envisage the country’s economy to grow at 4.5% in 2012, albeit at a more moderate pace than the +5.1% achieved in 2011. This will underpin corporate earnings growth, projected at +12.2% and +7.9% for 2012 and 2013, respectively (+8.7% and +7.0% ex-Tenaga).

But, anticipate a short-term market pullback?

Notwithstanding improvements in the global economy, we continue to expect a market pullback and consolidation in the 2Q. In our view, apart from rising market caution ahead of the general election due to the uncertain election outcome, earnings will also have to play catch up for stocks with rich valuations before the market can scale new heights. On the external front, concerns on Mainland China’s economy and a potential risk of an oil-supply shock will also weigh down market sentiment.

Beyond the near-term pullback, we expect market sentiment to gradually improve as global economic uncertainties clear out. As central banks in advance countries have unveiled more quantitative easing programmes and pledged to maintain extremely loose monetary policy to support economic growth, global financial markets are still likely to be awash with liquidity. Consequently, we are maintaining our end-2012 FBM KLCI target at 1,650 based on 14.5x 2013 EPS.

Given our more upbeat view on the market for the 2H, we believe “buy on dips” is still the best strategy to outperform the market even though defensive stocks will provide greater stability for the portfolio, particularly in the 2Q. Sector-wise, our key overweight continue to be telecommunications, gaming, Plantation, oil & gas and consumer.

Source: RHBRI report

RHBRI: 4Q11 Earnings Review and Market Strategy

In tandem with the moderating economic growth trend, corporate earnings remained weak in 4Q 2011. Of the 113 reported earnings that we cover, 55 of the results (48.7% of the total) were within our expectations, 33 below projections (29.2% of the total) and 25 above forecasts (22.1%) (see Table 1). Against the consensus numbers, 44.2% of the reported earnings were within expectations, 38.1% below and 17.7% above projections (see Table 2). Sequentially, net EPS for the FBM KLCI stocks under our coverage weakened back to +1.7% qoq and +2.8% yoy in the 4Q, from +8.9% qoq and +12.4% yoy in the previous quarter (see Chart 1).

However, the downgrade to upgrade ratio has improved significantly to 1.07 times, from 1.65 times in the previous quarter. Overall, 2011 has been a year where Corporate Malaysia suffered from slowing sales and falling utilisation rates. This, coupled with the trend of higher costs, resulted in falling margins for many companies under our coverage. Consequently, normalised net EPS growth for the FBM KLCI stocks under our coverage slowed sharply from 20.9% in 2010 to +4.7% in 2011. The sharp slowdown in EPS growth, however, partly reflected the higher base effect as well as the plunge in Tenaga’s earnings arising from the gas curtailment issue. Excluding Tenaga, our 2011’s normalised net EPS for the FBM KLCI stocks has slowed down less significantly to +10.1%, from +21.2% in 2010.

Businesses Turning More Upbeat

What’s worth highlighting is that Corporate Malaysia are becoming less pessimistic and expect their business prospects to be stable with prospects of it turning up gradually as the year progresses. Likewise, we expect almost all sectors to record flat or improved earnings in 1Q 2012, with the exception of transport and semiconductor sectors. In our view, earnings of the transportation companies will still likely to be weighed down by slower economic growth and rising fuel costs. Whilst we also expect the semiconductor industry to suffer weak earnings in the 1Q, its outlook should improve from 2Q as cost rationalisation and stronger chip sales will likely translate into a significant improvement in earnings thereafter.

Meanwhile, we have seen more aggressive inventory write-down by companies, particularly amongst the steel product manufacturers. At the same time, banks could have also made pre-emptive provisions for loan impairment. Consequently, barring unforeseen circumstances, the downside risk to corporate earnings may not be as significant moving forward and analysts have turned less pessimistic in their assumptions for earnings projections.

Earnings Revised Up

Overall, we have adjusted some of the assumptions, translating to an upward revision in our 2012’s normalised net EPS growth for the FBM KLCI stocks under our coverage to +12.3% (see Table 3), from +10.3% previously (as reflected in our 2012 Market Outlook & Strategy Report dated 16 December, 2011). Excluding Tenaga, our 2012’s normalised net EPS for the FBM KLCl stocks has also been revised up to 8.8%, from 7.8% two months ago. The upward revisions in earnings were more significant in the oil & gas, consumer and utilities sectors (see Table 4). Similarly, our 2013 earnings estimate for the KLCI benchmark has been tweaked up slightly to 7.9% (+7.0% ex-Tenaga), from +7.3% (+5.5% ex-Tenaga) previously.

General Election Will Create Volatility,

Not Likely To Be A Game Changer

On the local front, a key event that will have significant bearing to the equity market is the impending general election. There are strong market expectations that the country’s general election (due in March 2013) will be held any time soon. Given what happened during the previous general elections on 8 March 2008 where the ruling coalition, Barisan Nasional (BN), lost two-thirds majority, there are fears that if BN were to lose a simple majority, the local bourse could suffer a major temporary setback. This is on account of uncertainty in the continuity of the country’s economic policies that could slow down the implementation of the economic Transformation Programme (ETP). We, however, believe that the likelihood of this happening is low.

Market Strategy :

Buy On Dips With Increasing Focus On Recovery Sectors

Whilst not all the external risk factors have gone away and the impending general election locally could also create uncertainty for the local bourse, the global economic recession risk is receding. Consequently, we are turning more positive on the market. Nevertheless, as fundamentals are just starting to improve, earnings will still need to play catch up for stocks with rich valuations before the market can scale new heights.

Consequently, the risk of a market pullback and consolidation in the near term is still high although we believe that any volatility in the market would provide opportunity for investors to accumulate fundamentally-robust stocks on weakness. We are also turning more positive on cyclical sectors that are poised for recovery, although investors’ risk perceptions can still change very quickly should situation turn out to be worse than expected. As a result, we would still recommend investors to hold some defensive stocks that have strong cash flows to pay sustainable dividends. A list of our top picks is reflected in table below, which includes “buy on weakness” tactical holdings.

Source: RHB Research Institute report

RHB 2012 Market Outlook & Strategy: Another Challenging Year Ahead

As we head into 2012, a lot of uncertainty remains. On the external front, the euro-debt crisis remains unresolved despite five major attempts to stabilise it. Meanwhile, the economic conditions in the Eurozone are deteriorating rapidly with major indicators pointing to the region entering a recession. A deeper-than-expected recession in the Eurozone would leave few countries unscathed.

In particular, the US economy, which is still in low gear, will likely be severely impacted, while China may also be in for a more severe downturn as effects of potential policy easing will take time to filter down to the real economy.

Slower Eonomic Growth Envisaged For 2012?

The Malaysian economy will not be spared and will likely experience slowing export growth, though this will be cushioned by resilient domestic demand given the progress in the implementation of the Economic Transformation Programme. We expect the country’s economic growth to slow down more significantly to 3.6% in 2012, from +5.0% estimated for 2011. This points to weaker earnings growth, projected to slow from 10.5% to 7.8% during the same period for the FBM KLCI benchmark (ex-Tenaga).

Domestic Demand Likely Be More Resilient

With slowing economic growth, general election and multiple headwinds from the external sector, we believe investors will be in for another challenging year ahead. Given a number of significant risks in the horizon, our end-2012 FBM KLCI target is set at a conservative level of 1,480, based on unchanged 13x 2013 EPS. We expect a volatile 1H with sentiment gradually improving in the 2H as clarity on the global economy improves and investors begin to look forward to an economic rebound in 2013.

Non-election plays?

For investors looking for stocks that are less sensitive to the outcome of the election, we recommend KLK (one of Malaysia’s largest and independent plantation companies, with effi cient yields that have set the benchmark for the sector), Public Bank (large and defensive bank with a conservative and highly-regarded management), Digi (foreign-owned, well-run and in the broadly stable telecom industry) and Parkson (holding company for Parkson Retail Group listed in Hong Kong and Parkson Retail Asia listed in Singapore, with exposure to resilient retail growth in China, Vietnam and Southeast Asia). In addition, Sarawak stocks like HSL, Jaya Tiasa and Ta Ann are likely to be relatively immune, as the state election was already held in April, with two-thirds majority given to the incumbent Barisan Nasional-linked chief minister.

Strategy

As global headwinds remain strong and situations could get worse, we continue to advocate a defensive investment strategy, focusing on high dividend yielding stocks with reasonably good growth potential. Nevertheless, after a period of volatility, a recovery will undoubtedly follow and as such, we believe it pays for investors to accumulate fundamentally-robust stocks on weakness for tactical plays. Sector-wise, our key overweight are telecommunications, gaming, plantation, oil & gas and consumer.

Source: RHB Research Institute

Why Maybank and CIMB gave up on RHBCap? (23 June 2011)

Merely less than one month of battle (not even pulling off the gun), both Maybank and CIMB today respectively announcing to abort the merger talks with RHBCap. Funny oh? First, the news of aborting was first reported by a Singapore newspaper, not Malaysia, and why not Malaysia? Second, both contenders had set end of June's proposals, announced just only last week. So fast change mind?

Both CIMB and Maybank are turning their heads away from RHB now.

Of course, between the dates, Abu Dhabi Commercial Bank (ADCB) made a significant headline when it sells its 25% stake in RHBCap to its sister company, Aabar Investment, for RM10.80 per share, which value RHBCap at 2.25 times RHBCap book value. Does this really affecting the merger talks?

What CIMB says?

In a statement Thursday, June 23, CIMB group chief executive Datuk Seri Nazir Razak said that based on its discussions and assessment of the present expectations of key stakeholders, the bank did not believe that it would be able to arrive at a value creating merger.

“Merger negotiations are both resource consuming and distracting for staff and stakeholders.

"Therefore, we prefer not to prolong our discussions unnecessarily, allowing all parties to return to ‘business as usual’ as soon as possible,” he said. (TheEdge)

What Maybank says?

“In light of recent developments and following further deliberations, the board of directors of Maybank has decided not to pursue the possible merger at this juncture,” Maybank said on Thursday, June 23. (TheEdge)

Who knows? RHB's investors should sell their holdings above RM10 previously.

What Finance Malaysia says?

"The merger talks most probably is still on-going, but behind the board room. ADCB's RM10.80 did set a hindrance for both parties to proceed with the merger talks, in order to convince other shareholders."

"Other than that, EPF's role is crucial for all parties to consider now. Sooner or later, EPF must divest its stake to below 20%. By then only can EPF remove itself from the day-to-day operations of RHB Bank. Remember, EPF's role was supposed to invest, not managing a company."

"Thirdly, Maybank and CIMB may think that the merger talks would takes a long time to consider, and it may affects the day-to-day operations of RHB Bank. Just like EONCap, many of their staffs are turning to other banks while Hong Leong Bank is launching and fighting its merger plans."

New Fund: RHB-GS US Equity Fund

Yet, another US fund is in town now. More and more new fund is focusing on the US market, given its relatively attractive valuations currently after the 2008 global financial crisis. If you want to invest in US market, you may consider this fund which is managed by the US "tai-ko" - Goldman Sachs.

The fund's objective is to seek to achieve long-term capital appreciation through investment in a collective investment scheme, which invests primarily in securities of United States of America companies. This a feeder fund, where 95% of the fund's NAV will feed into the Goldman Sachs US Equity Portfolio (Target Fund).

Information of the Target Fund

The Target Fund is a portfolio of Goldman Sachs Funds, a public limited company qualifying as an investment company organized with variable share capital, in which Goldman Sachs Asset Management International is the investment manager of the fund. The Target Fund is domiciled in Luxembourg and denominated in USD and regulated by Luxembourg Supervisory Authority.

Why is this fund different from other funds?

1. The Best of both worlds. A portfolio that balances the best ideas of Growth and Value to provide US market exposure without style bias.
2. A disciplined investment process. The Goldman Sach's Investment Committee constructs a US large cap portfolio thoroughly researched companies that exhibit quality characteristics and compelling valuations.
3. A proven history. The portfolio draws on the best ideas of the US Growth and US Value Teams with proven track records going back 30 and 11 years, respectively.

Source: Prospectus

As at 31 March 2011 (Goldman Sachs Asset Management)

As at 31 March 2011 (Goldman Sachs Asset Management)

Source: RHB Investment Management

Click here to download prospectus

OSK Stock Picks for June 2011

The KLCI performed as expected as a reasonable stream of results provided a stable floor while strong news flow drove up Bigger Caps. For June, while the 4 upcoming IPOs and the KLCI review may draw some attention, OSK believe all eyes will be on the potential tussle between CIMB and Maybank over the control of RHB Cap.

OSK Research

Outlook: Possibly not as quiet as expected

With a total of 4 IPOs going for listing in June and July, it was expected that the market to be somewhat quiet as investors stored away funds to subscribe to the IPOs or buy into them when traded. Despite concerns that the amount of funds raised by the 4 IPOs, namely UOA Development, MSM Malaysia, Axis International REIT and Bumi Armada, would suck the liquidity out of the market, but the amount of funds (RM7.7bn) is far less than that raised in 2010 with the listing of MMHE and Petronas Chemicals (RM14bn). Thus, there should not be much of an issue on the liquidity of the market post the 4 IPOs.

Funds to be raised by IPOs in 2011 (Source: Company Data, OSK)

Together with the KLCI review

Another market's attention factor is the upcoming KLCI review, which are to be announced on 6 or 7 June and become effective in the 3rd week of June. In this review, OSK see MMHE and UEMLand possibly replacing PLUS and MAS, which will be privatized and has fallen below the Top 40 stocks by market cap respectively.

OSK Research, Bloomberg

Banks and Situational

Given what may still be a lackluster broader market in June, we are focusing on a number of situational stocks that should see better news flow during the month.

1. First, we have UEMLand who will likely joining KLCI before end June.
2. We also have KimLun Corporation which may see a pick up news flow on Iskandar Malaysia during the month.
3. Next, we have Khazanah's Pos Malaysia stake sale completed in the 3rd week of June coupled with details of what DRB-Hicom plans to do with the company.
4. Finally, we have 2 smaller banks, namely RHB Cap and Alliance Financial Group that should see sentiment on improved M&A rumors.

Source: OSK Research

New Fund: RHB Dynamic Oil-Gold Capital Protected Fund

Launched on 11th March 2011, RHB Dynamic Oil-Gold Capital Protected fund is investing in oil and gold, which have the potential to perform in both areas that have great bullish and bearish markets.

This is a 3 years capital protected fund. As usual, it will invests at least 85% of the NAV in zero-coupon negotiable instruments of deposits. Meanwhile, up to 10% of the fund's NAV will invest in an over-the-counter (OTC) option that gave investors returns (if any).

The OTC option will provide exposure to the performance of the Option Strategy, which is an index, maintained by the issuer of the OTC option and is subject to a dynamic risk adjustment linked to the realized volatility of the underlying.

Option Strategy

This Option Strategy is a rules-based strategy computed and developed by the option issuer / counterparty. It aims to tap into the growth of oil and gold through the use of a "momentum" based strategy to capture the trends of the Underlying and also, volatility stabilization to reduce the exposure to the Underlying if the volatility is high.

The theory behind momentum strategy assumes that a leading performer from the last period will continue to be leading performer in the next period, while the volatility stabilization will protect investors against sudden changes in the Underlying prices.

How to determined the asset class?

In determining which asset class to invest into, the Option Strategy will look at the below rations:

1. (gold price / oil price) spot ratio
2. 60 days Moving Average (MA) of the Gold / Oil Ratio

To read the prospectus, please click here.

Source: RHB Investment Management

Related Posts:

Unlocking the Mystery of Capital Protected Fund

New Fund: OSK-UOB Capital Protected Sector Strategy Fund

FIMM is a Self-Regulating Organization now. What does it mean?

New Fund: RHB-GS BRIC Equity Fund

After being granted the licenses of fund management and corporate finance last year, Goldman Sachs has since establish an exclusive partnership with RHB Investment Management Bhd to jointly develop fund management products for distribution to investors in Malaysia. RHB-GS BRIC Equity Fund is the maiden fund from the partnership, and also the first fund being launched by RHB Investment Management this year.

The fund's objective is to seek to achieve long-term capital appreciation through investment in a collective investment scheme, which invests primarily in securities of Brazilian, Russian, Indian and Chinese companies.

Investment Strategy...

The feeder fund will invest at least 95% of the Fund's NAV in "Goldman Sachs BRICs Portfolio" (Target Fund), which is a portfolio of Goldman Sachs Funds incorporated on 5th November 1992.

Click here to Download Prospectus