KLCI negotiating a mid-cycle correction

AmResearch research head Benny Chew Yow Leng reiterated his view from last week that after rebounding 26% off lows in March 2009, the KLCI was now negotiating a mid-cycle correction.

"Our analysis of previous two bear rallies — in 1998/1999 and 2001 — indicates that the pullback after troughs tends to be transitory, stretching no longer than two months. And, the dips were 15%-22% off intermittent highs.

"This time around, the correction may be less dramatic because the starting point of the recent upswing was from a depressed trough price earnings of 11 times in March 2009, versus 16 times in April 2001," he said.

He said in the immediate term, the KLCI might dip 10% off June's high, forming a base at 980.

Chew said the market would take time to respond to the measures announced by the government on Tuesday, adding that the measures were for the longer term.

"Our base case of an economic recovery by 4Q09 supports a positive earnings revision cycle, which has just started."

"We raised our fair value from 1,050 to 1,190 by rolling-over the valuation base into 2010 on an unchanged PE of 15 times. Next leg up will be accompanied by a strong rebound in earnings (2010: +17%), set against a still-healthy liquidity backdrop," he said.

OSK Research said although the KLCI chalked up a decent performance last month with a 31-point rise, the bout of profit taking in the middle of the month sapped the strength of its top picks, with only MMC Corporation Bhd eventually outperforming.

It said while Najib's announcement of capital and property market liberalisation is positive, the reaction was rather muted.

"For July, we caution that the KLCI could well fall short of our initial sell trigger of 1,150 points.

"We advise investors to exercise greater caution and switch to a more defensive strategy with higher beta plays MMC Corp, Wah Seong Corporation Bhd and Lion Industries Corporation Bhd replaced with Public Bank Bhd, Axiata Group Bhd and Top Glove Corporation Bhd," it said.