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Year-end window dressing for KLCI is broad based, says HLIB Research

TheEdge Fri, Nov 08, 2019 11:56am - 7 months ago

KUALA LUMPUR (Nov 8): Hong Leong Investment Bank Research (HLIB) has maintained its 12-month KLCI target of 1,660 points, which is based on 1.5 times (-0.5 standard deviation [SD]) 2020 PE.

In a Market Outlook note today, HLIB’s Jeremy Goh said drawing for historical probability, November has a 70% chance of ending red; suggesting a strategy to buy on any weakness this month, to ride on a likely December upside.

“We noticed that November has traditionally been a red month for the KLCI; negative returns ranging -1.3% to -3.7% in 7 of the past 10 years (exceptions were in 2009, 2013 and 2015).

“Broadly, we reckon that this could be due to misses on the 3Q results season, which are mostly reported in November,” Goh said.

He said this suggests that (albeit simplistically), one should position for a possible year-end window dressing, if there is weakness this month (November).

Goh pointed out that the KLCI registered positive December returns in nine of the past 10 years, ranging between 0.6% and 4.8%.

In an attempt to study the next possible market anomaly, for instance the year-end window dressing, the research house said as it noticed regardless of market movement throughout the year, the window dressing phenomenon has been quite significant.

“The “Oct Effect” came and left without leaving much scars (KLCI +0.9% m-o-m); ironically this perceived market anomaly has historically not played out much in Malaysia, with the KLCI recording negative Oct returns only twice over the past decade,” Goh said.

He said against the ASEAN-5 index, the KLCI’s 90% hit rate on positive December returns is also higher than the former’s 60% over the past decade.

Goh said after coming off -5.2% year-to-date (-5.3% currency adjusted), the KLCI is the worst performer within ASEAN-5 (rest are in positive territory).

He said the fundamental justification for the historical probability for a December upside, could be that the valuations are pretty attractively priced. This: (i) PE (1-year forward) is near -1SD, (ii) spread between earnings yield and 10-year MGS is at +2SD and (iii) P/B nearing 10-year low.

Externally, progress on the US-China trade talks appears to have a positive tilt, with a possible “phase 1” deal before year end.

“On the downside, we are hopeful for this to be contained, given tell-tale signs that foreigners are already underweight on Malaysia: (i) cumulative net change in foreign holdings (since 2011) is now at its lowest level of -RM20 billion and (ii) foreign shareholding of 22.7% (Oct) is below mean (23.1%) at a 2.5 year low. Our unchanged 12-month KLCI target of 1,660 is pegged to 16.5x (-0.5SD) 2020 PE,” Goh said.

He said potential window dressed stocks are Axiata Group Bhd, Digi.Com Bhd, Genting Bhd, Hong Leong Bank Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd, Malayan Banking Bhd, Petronas Dagangan Bhd, Petronas Gas Bhd, Petronas Chemicals Group Bhd, Public Bank Bhd, Sime Darby Bhd and Tenaga Nasional Bhd.

At 11.33am, the FBM KLCI shed 0.90 points to 1,608.43.

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