By Chan Quan Min
The world’s longest running bull market could be approaching ceiling valuation, requiring investors to tread carefully, said Kenanga head of research Chan Ken Yew.
Chan Ken Yew
Chan presented research to reporters in a press conference today that suggested that the Malaysian equity market could be “approaching overbought territory.”
According to Bloomberg data as of end-June, Malaysia’s bull market has lasted 2,096 calendar days, almost six years and five times as long as the average advance since 1977. The definition of a bull market is a gain of at least 20% without a subsequent drop of the same magnitude from a recent high.
The same 2,096-day bull market is now approaching, according to Chan, “ceiling valuation” of 18.5 times price-to earnings multiple.
Given the market’s hefty valuations, Chan said investors would need to be more “selective” in the current climate. The benchmark FBM Kuala Lumpur Composite Index (KLCI) is trading at about a 3% discount to consensus targets.
At such “overbought” levels investors “might as well turn to the money market” which returns around 3% almost risk-free, he added.
Among “negative factors capping market upside” named in a Kenanga report prepared by Chan include indecisive interest rate direction, less attractive valuations, historically low volatility, weaker 3Q14 seasonal quarter, lack of corporate earnings catalysts and stretched valuations.
The report, which had to be “very selective in sector targeting and stock picking,” named building materials, construction, gaming, gloves, mortgage REITs, plantations, power utilities, water utilities and transport & logistics as ‘overweight.’
“For the building materials sector, especially steel, our upgrade is underpinned by potential trade action on excessive Chinese steel imports which should improve local steel prices significantly,” the report noted.
“The rating for transport & logistics has been upgraded on buoyant shipping data and attractive valuation on big cap MISC following its share price weakness of late.
“We upgrade the water utilities sector’s rating after a series of positive developments in the past three months. Our upgrade is premised mainly on the fact that we are finally going to see Selangor’s water industry consolidate soon,” the report also noted.
The investment strategy going into the third quarter (3Q14) is “trend is your friend,” according to Kenanga’s Chan.
“In general, we prefer to adopt a ‘buy on weakness’ strategy to capitalise on broad liquidity and potentially low interest rate environment. The ideal ‘buy on weakness’ level is now raised to 1,835 and below (6% discount to consensus target price) from below 1,815 previously.”
The FBM KLCI closed the day’s trade at the 1,891.16 mark.
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