One of the basic equity investing strategies is to “follow the
money”. In the longer-term, the word ‘money’ is almost invariably refers
to the underlying corporate earnings, while in the shorter-term it may mean the flow of liquidity.
SHORTER-TERM VIEW
Curious observations of foreign liquidity behavior… Empirical
evidences suggest that foreigners tended to sell on rumor, i.e. Taper
Tantrum, but turned buyer/neutral on fact, i.e. Actual Taper.
Thenceforth, it is notable that foreigners were again selling on yet
another rumor, i.e. Countdown to Rate Liftoff, hence they were
anticipated to turn buyer/neutral upon the fact, i.e. Actual Rate
Liftoff.
…which suggested near-term market support. As the actual rate
liftoff took place in mid-December last year, a repeat of past behavior
should result in a fairly supported equity market during at least the
first half of 2016. On this score, the equity market began the year in a
jittery mode attributable to the further slump in crude oil prices to
below USD30pb. However, the FBM KLCI made only a shallow retreat with
good support seen at between 1,600 to 1,630 points and subsequently
staged a gradual rebound and revisited the 1,700 points levels earlier
this week.
Foreign liquidity returning with sentiment buttressed by recovery in crude oil and Ringgit.
It must be highlighted that the gradual rebound in local equity prices
coincided with the general returning of net inflow of foreign liquidity
since the final week of January this year and which also corresponded
thenceforth with the improvement in crude oil prices (from ~USD27pb to
40pb) as well as the relative strengthening of Ringgit against US Dollar
(from ~USD/MYR4.40 to 4.10).
Technically, the market barometer is turning bullish as it broke
above the 200-day moving average last week. However, it is notable that a
breakout price momentum would normally retest the breakout line as it
encounters profit taking activities before the next northward push.
Hence we could be looking at the market undergoing consolidation in the
interim period with a prevailing resistance-turned-support level at
~1,675 points.
FBM KLCI: Price and 200-Day Moving Average
LONGER-TERM VIEW
Earnings versus price. We reiterate our assertion that empirical
observations between earnings and price are conclusive with regard to
the nature of their secular direct relationship. This is despite the
ever present ‘noises’ from short-term price volatility which is
influenced by market sentiment and other situational issues. Hence our
assessment on the likely longer-term trend path of the FBM KLCI is
highly dependent on the expected earnings growth performance during the
similar tenure.
Recovery in corporate earnings growth… On that score, it must be highlighted that the (Bloomberg) consensus 2016 FBM KLCI earnings growth is expected to return to a healthy level of 10.0% partly attributable to the low-base effect from general earnings underperformance in 2015. The anticipated current year performance is in stark contrast to the recent ‘earnings recession’ as attested by 2015 earnings growth of -12.1% as well 2014 and 2013 growth figures of 1.9% and -5.0% respectively.
FBM KLCI historical and forward consensus earnings growth
…with a reduced risk of forward earnings underperformance.
Furthermore, we foresee a reduced risk of material downward revisions in
forward earnings estimates due to the already lowered expectation
hurdles (with key revenue and cost drivers as well as other assumptions
pegged at quite pessimistic levels) pursuant to six consecutive quarters
of earnings disappointment up until 2QCY15. In this regard, it is
notable that the two most recent results quarters to 4QCY15 have
produced aggregate results which met our expectations.
FBM KLCI: Earnings versus Price
Macro outlook may restrict market downside. In addition, a bear
market generally occurred in reaction to drastic deterioration in the
macro economic performance such during the 1998 crisis and 2008 economic
downturn. Hence, as the outlook for Malaysia's economy remains rather
sanguine with (Bloomberg) consensus GDP growth for this year expected at
4.4%, we do not foresee the equity market turning bear anytime soon.
Having said that, we remain mindful of intermittent cyclical pullbacks
that may take place due to varied situational issues, even amidst
continued healthy macro growth.
Reiterate year-end 2016 FBM KLCI baseline target at 1,800 points. It is notable that FBM KLCI price trajectory since 2013 mimicked the underlying flat to negative earnings performance. On that score, the anticipated earnings growth recovery in 2016/17 may also see the benchmark similarly escaping the recent ‘price recession’. Therefore, premised on the rooted behavior whereby earnings and price are trending broadly hand-in-hand, we reiterate our 2016 FBM KLCI target at 1,800 points.
source: MIDF Research - 10/03/2016
http://klse-online.blogspot.com/2016/03/follow-money-long-and-short-of-it.html
