OSK Stock Picks for April 2011

After being hit by a few Black Swan events, markets rebounded in March with the KLCI ending 1Q in the black. Moving into 2Q, we still see some short term volatility but are confident of an eventual rally to close in on our year-end KLCI target of 1680 points. We advise investors BUY Big Caps on potential rebounds while focusing on the more defensive Small Caps given their superior performance over the past few months. The favorite sectors remain Banks, O&G, Property and Construction in the mid-to-short term while the longer term buys are Media and Healthcare. This strategy is reflected in our April top buys as well.

Timber the BIG winner...

For March, timber stocks were actually the big winners, including names such as Suber Tiasa, Jaya Tiasa, TaAnn, WTK and Lingui, on hopes for better timber demand in view of reconstruction efforts in Japan. Nonetheless, these counters are not part of the FBM100. Instead, among the FBM100 constituents, media player Media Chinese and Petronas companies Petronas Dagangan and Chemicals were the big winners. Sectoral wise, O&G led the way followed by Technology (JCY), Media (MCIL), and Gaming (Genting).

Outlook: Moving into 2Q

Moving into 2Q, we see the possibility of some short-term volatility for the remainder of 2011 but market fundamentals remain sound. We maintain our year-end KLCI target of 1680 points based on an average of the 2011 KLCI fair value (1648 points 16x PER) and 2012 KLCI fair value (1710 points 15x PER). With this in mind, we maintain Overweight on the Malaysian market. Our view is driven by 4 key factors:

• The economy will continue to grow
• Upside and Downside are fairly equal
• News flow ahead of the General Election remains very supportive
• Earnings should match expectations

For April - A month of 2 Halves

We believe that there may well be 2 distinct halves in the month of April. The first half should be positive for the market, with the one of the key factors being the Invest Malaysia conference which will be held on 12 April. Among the announcements could be:

• The disposal of Khazanah's stake in Pos Malaysia
• The next Risk Service Contract for marginal oil fields
• Release of Government lands for property development

However, for the second half of the month, we are concerned of greater market volatility, due to potentially less positive outcome of the Sarawak elections. Since BN already holding more than 80% of the state seats, we believe the risk is that their performance may drop in this upcoming election. Consequently, this may spark some knee jerk selling until the 1Q2011 reporting season.

Source: OSK Reseach Report

Post-Japan Disaster: After Timber, it's Glove Sector?

As per our previous posts (How Should Investors trade after the Japanese Disaster?), we wrote about timber counters, and it's proven the right sector investors should look at. And, below is the performance of those mentioned counters.

www.financemalaysia.blogspot.com

All of them outperformed KLCI, which recorded -2.20%. Why WTK outperformed its peers? Simple answer is its cheaper share price and better liquidity. In fact, TaAnn and WTK is the main focus because they export 80-90% of their products to Japan. This puts them in the limelight of stocks investors should look at for the moment.

Why should you look at Glove sector next?

After timber, glove sector should outperformed the generally weak market sentiment. Investors are scared. Those who already bought was stuck-in there. Those who already sold was staying sidelined. And, those who dare to buy now is focusing on timber stocks only - and today glove.

Main reasons were:

1. Demand for medical glove is expected to increase substantially. After the disaster, Japan should be facing another problem - outbreak of diseases. Because of the wet and dirty condition after tsunami, diseases tends to spread easily and this could intensify the demand for gloves being used by medical personnel and public in general.
2. Stronger USD. One of the setback for our glove makers is weakening of USD which could harm the export market to US. Post-Japan disaster, USD was expected to strengthen in line with "flight to safety" strategy employed by global investors. This is an advantage, or in fact, the turning point for our glove makers.

www.financemalaysia.blogspot.com

With these two important factors, glove sector should be on investors' radar in the near future. Indeed, you do not have much choice in this kind of market where everything seems going down hill. Either you stay sidelined, or brace the storm to invest in these counters. And, my personal stock-picks would be Supermax due to its attractive valuation and good liquidity.

Finance Malaysia urged all Japanese to stay strong, and we will support you from afar. We are living in the same planet. We are 1 actually.

How should investors trade after the Japanese Disaster?

Special edition from Japanese Earthquake on 11/03/2011 (black Friday?).

Duped as Japan's deadliest disaster in more than a century, 10m high tsunami crushing on the coast line, and yet to be confirmed - world's worst nuclear disaster in 25 years. I'm sitting in front of computer screen, reading the news while monitoring the share market that Friday. The more I read, my heart is bumping faster, and the share market is going downhill.

Modified Tsunami picture

In fact, KL is raining for whole day, signaling the bad situations would appeared somewhere, and it materialized in Japan shortly. In the morning session, KL market is rather quite. I asked myself: "Today, traders are still in bed due to the favorable sleeping weather?".

To recap, below is the performances of major market on Friday.

Bloomberg

What should investors do?

And, how should investors trade going forward?

Personally speaking, I don't think this is a good time to accumulate. We never know the bottom. Catching the falling knife is very dangerous, and it's not worth to take the risks. Let's gauge it with the previous major earthquake in Japan, the 1995 Kobe temblor. According to Macquarie Group Ltd, Japanese stocks fell 8% in the week after Kobe temblor.

Meaning, with 1.72% down on last Friday,  there is another 6.28% to go. But, the aftermath is more serious this round, thus, at least 10% slump is justifiable. Japanese yen strengthen considerably on Friday, as investors pull money out from share market and into government bonds or money market.

Sorry to say that the Japanese outlook is very bleak currently. Being the world's most indebted country, and with a negative growth in 4Q2010, Japan needs time to rebuild and time to restore investors' confidence.

Malaysia timber companies to do well?

However, timber companies should do well in the expense of Japan's disaster. Stocks to watch is Ta Ann, WTK and Jaya Tiasa. Japan is the single most important market for local timber companies. As such, the main catalyst for timber sector now is the reconstruction of affected area in Japan in the coming months.