KUALA LUMPUR: The outlook on the global economy and the European sovereign debt crisis remains hazy going into September especially after the selldown in global equities, says OSK Research.
The research house said on Friday, Sept 2 that for September, it would continue to stick to its defensive top buys which have recession resilient business models and some capacity to rebound after the recent sell-off.
It said despite the 6.5% drop in the FBM KLCI in August was in line with the global sell-off in equities, it believed the outlook on the global economy and the European sovereign debt crisis remained hazy.
OSK Research said investors should avoid aggressive bottom fishing and it advised investors to stick to defensives with some rebound capacity, especially with 2Q2011 earnings looking decidedly weak.
“We foresee a 1% - 2% cut in our earnings growth forecast and KLCI year-end target,” it said.
The research house cautioned the selldown in global equities in August reflected uncertainties over global economic growth as well as the concerns over sovereign debt positions in Europe.
“We believe these uncertainties have yet to be resolved,” it said.
To recap, OSK Research said August, which was the month of Ramadhan, saw strong news flow in Malaysia.
Among the corporate news were the share swap between shareholders of MALAYSIAN AIRLINE SYSTEM BHD [] and AIRASIA BHD [], the sale of ExxonMobil units to San Miguel, the award of a small field contract to Dialog and Sime Darby’s purchase of a 30% stake in Eastern and Oriental Bhd being amongst the more noteworthy news.
OSK Research, which was scheduled to issue its full results round-up on Monday, Sept 5, said the preliminary indications were the 2Q2011 results were below expectations.
“As such, we are likely to see a 1.0 to 2.0 percentage point cut in our 17.1% earnings growth forecast for 2011 and 12.8% estimate for 2012.
“This will likely lead to a cut in our year-end 1557 pts KLCI target although we will likely leave our 2012 KLCI fair value of 1,466 intact on a higher price-to-earnings ratio (PER),” it said.
OSK Research said despite the 6.5% fall in the KLCI in August, it believed that uncertainties on the global economic outlook would linger.
It advised investors to continue to focus on defensive stocks while nibbling at some rebound plays in September.
“For those with a higher risk appetite, trading in recession resilient Mid Caps that have been sold down such as AirAsia, KPJ Healthcare and Supermax is an option,” it said.
It also advised strongly against aggressive bottom fishing at this level as yet.
The research house said it continued to see a potential KLCI maximum for the remainder of the year at 1,557. The potential KLCI minimum for the remainder of the year was 1,378.
As for 2012, the KLCI fair value was 1,466, it said.
Despite the cautious outlook, OSK Research said a short term rebound was possible.
“Given the reasonable rally in global markets over the past week when the KLCI was closed for holidays, a modest rebound in the KLCI is to be expected. Nonetheless, given uncertainties in the global economic outlook, we would caution against an aggressive bottom fishing strategy at this point in time,” it said.
OSK Research said in view of the strong possibility of an early general elections by year-end, the re-election of the current Barisan Nasional government might spur a modest rally in the market post elections.
Hence, its view was that a better time to bottom fish might be when profit taking accelerates ahead of the election date.
“Some trading positions may be taken in Mid Caps. While we continue to advocate a generally Defensive strategy, investors with higher risk appetite may wish to trade in selected Mid Caps that have been sold down of late and might appear attractive,” it said.
The research house advocated Mid Caps with longer term recession resilient business models such as KPJ Healthcare and Supermax.
It explained bashed-down Mid Caps tend to outperform when a recovery sets given their high degree of recovery.
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