More Upside for FBM KLCI in the Weeks Ahead

The Bursa Malaysia market extended gains a fourth week with banking stocks leading the rise after Bank Negara raised interest rates last Thursday, fueling optimism the domestic economy is on track for a stronger-than-anticipated recovery.

Week-on-week, the blue chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) climbed 29 points or 2.28% to 1,299.78, with CIMB (+70sen), Maybank (+43sen), Genting Bhd (+34sen) and Axiata (+14sen) representing more than two-thirds of the index’s rise.

Daily average traded volume and value improved further to 884.7mn shares worth RM1.53bn, the highest in five weeks, compared with the 695.6mn shares and RM1.25bn average the previous week.

The rise in banking stocks is hardly surprising as it has been highlighted in last week column that any increase in OPR will benefit the banks as almost all of them have greater exposure in the floating-rate loans except AMMB. Previous week’s announcement on stronger than expected GDP and last Thursday’s announcement on rate increase lifted market optimism about the economy and banks being the proxy to it benefitted.

BNM’s decision to normalize rates could be timely considering that the broader economy has started to recover and cost pressures could be creeping in.

Malaysia’s trade data that was released last Friday echoed the same sentiment as exports surged by the most in more than 11 years in January as manufacturers shipped more goods to China, which more than doubled from year ago to RM7.1bn.

To recap, overseas shipments rose 37% yoy to RM52.5bn after gaining 18.7% in December, higher than Bloomberg estimate of 14 economists for 31.3% increase. E&E sales, which represent 41% of total exports, surged 55.6% compared with 33.3% the previous month.

The exports numbers imply that companies with high exposure to China will continue to progress as demand expands with rise in affluent middle-income population.
The growth in E&E sector will benefit exporters as demand in the consumer electronics and communication sector continues to grow higher than the expected growth rate in the broader economy. China will be the growth driver with its consumer electronics and wireless semiconductor segments expected to grow by 16.3% and 24.9% in 2010.

Unisem and MPI have plants in China that are running at full capacity.

They have indicated about the strong turnaround in demand and their willingness to even double up this year’s capex to meet the growing demand, especially from China. Consolidation of older packages, emphasis on growing new devices like Flip-chip Bonding and Wafer-Level Chip Scale Packaging and migration towards copper wire bonding on some of the packages produced in China will be earnings enhancing for Unisem.

While MPI will continue to reap the benefit from a growing demand from its Micro Leadless Packages that earn superior margin, the staring of its new strip to strip plating and etching lines in March and May this year will add to production efficiency and sales growth.

The Cabinet could make a decision about the increase in gas price and electricity tariff in mid-March that could have wider impact on prices of good and services. As the two-tiered fuel pricing mechanism has been delayed, a slight hike in fuel prices will have similar impact on inflation too.

Nonetheless, as the inflationary pressures are still low (January CPI at 1.3%) the subsequent increase in OPR for the rest of the year could be capped at 50 basis points to accommodate economic growth.

Considering that the Government has raised electricity tariffs by 11.4% and 24% in June 2006 and July 2008 respectively after raising the gas tariffs, a double digit increase cannot be discounted. If the current gas tariff of RM10.70 per million British Thermal Unit (mmbtu) is floated at international market rate of RM16/mmbtu, the effective electricity tariff has the potential to rise by 10%.

The commercial and industrial users could pay double the amount of consumers. e.g 12% vs. 6%. The impact will be “cashflow neutral” on Tenaga unless it gets the base tariff hike that it wanted so that the return on its regulated asset base value equals to its weighted average cost of capital.

A hike in gas tariff hikes will affect industrial players like glove makers and Petronas Gas but some of them have the ability to pass the increase to customers.

Technical Outlook
New spot month March KLCI futures contract traded on Bursa Malaysia Derivatives Berhad settled at 1,303, rising 27 points, or 2.1% last week but premium to the cash index decreased to 3.22 points, compared with the 5.22-point premium the previous Friday.

Stocks began trading last week on a bullish note on Monday, following positive external leads arising from the strong overnight US market due to robust fourth-quarter GDP numbers and stronger-than-expected earnings from CIMB and Axiata, which led gains and lifted the KLCI to close 12.62 points up at 1,283.4.

However, the absence of strong follow-through buying momentum on the broader market forced lower liners to extend profit-taking consolidation for the most part, with market breadth staying negative for the first four trading days last week.

Nevertheless, banking stocks led by Maybank, CIMB and Public Bank staged breakout rallies on Friday, after Bank Negara’s decision to raise the OPR by a quarter point to 2.25% improved the outlook for economic recovery.

The KLCI rose from opening low of 1,276.52 last Monday to eventually peak at high of 1,300.74 by late Friday session, expanding the weekly trading range to 24.22 points, compared with the 17.15-point range the previous week. The FBM-EMAS Index rose 177.08 points or 2.1% last week to close at 8,737.28, while the FBM-Small Cap Index climbed 140.01 points, or 1.32% to 10,777.47.

While the daily slow stochastics indicator for the KLCI is easing from the highly overbought zone, the weekly indicator has hooked up and sparked a buy signal. The 14-day Relative Strength Index (RSI) indicator has improved further to a more bullish reading of 68.57, while the 14-week RSI climbed higher to 66.89 as of last Friday.

The daily Moving Average Convergence Divergence (MACD) trend indicator expanded higher to sustain a bullish trending signal, while the weekly MACD signal line has hooked up for the first instance since triggering a sell in November 2009. As for the 14-day Directional Movement Index (DMI) trend indicator, the +DI and –DI lines expanded away from each other after crossing for a buy the previous week, while the ADX line is turning up for an early trending signal.

More bullish technical indications on the KLCI, highlighted by a weekly stochastics buy signal and hook up on the weekly MACD for the first time since November last year, support a bullish breakout above the current pivot high of 1,308.52 seen on 21 January.

Nonetheless, a strong follow-through buying momentum in excess of one billion shares daily will be critical to sustain the breakout to higher levels. The rally on Wall Street last Friday, triggered by lower-than-expected job losses last month which reinforced the outlook for a stronger economic recovery and lifted the benchmark Dow Jones Industrial Average by 122 points or 1.2% to 10,566, should spillover to help the local market extend gains early this week.

A successful breakout above the 21 January pivot high of 1,308.52 will see subsequent higher resistance levels at 1,320 and 1,340. The immediate upside target is at 1,354, representing the 76.4% Fibonacci Retracement (FR) of the tumble from 1,525 to 801, where we expect more significant profit-taking and selling to surface.

Immediate support is revised upwards to 1,288, the 76.4%FR of the sell-down from the 21 January high of 1,308 to the 9 February pivot low of 1,224. A stronger support platform will be at 1,276, the 61.8%FR level and matching the important 50-day moving average which is currently at 1,275.

Chart-wise, anticipate banking stocks AFG, Maybank, Public Bank and RHB Capital to continue attracting buyers on outlook for stronger economic growth, while Genting Bhd and Genting Malaysia should extend their technical rebound gains.

Rubber glove makers Adventa, Latexx and Supermax are attractive to bargain on price weakness, while other lower liners are set to rebound from consolidation once robust buying momentum returns.