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Tuesday, November 1, 2011

November Strategy - Be Prepared For Profit Taking (OSK)

We were wrong on October as we had expected the market to retrace towards the lows hit in late September. Instead, global markets rallied on hopes that the European sovereign debt crises could indeed be resolved through loan haircuts and the EFSF. For November, given the previous month’s sharp rally, we expect some pullback in global markets, with Malaysia being no exception. Barring the announcement of a General Election, we remain Defensive on the Malaysian market and would advocate a BUY only if the KLCI retraces towards 1,300 pts, while we may call a SELL if the market heads towards 1,533 pts. NEUTRAL for now, with our defensive Top 5 Buys all maintained.

Why we are NEUTRAL in our view. Despite the wild swings in the KLCI, we retain our NEUTRAL view on the market and maintain our Top 10 Defensive BUYs. This is because:
We are not positive on the fundamental outlook. Despite the potential resolution of the sovereign debt crisis in Europe, we continue to see the whole continent being in a difficult position between the flagging economic growth that should actually require stimulus and budget deficits that have required the cutting of spending. As such, we feel that there is still a risk of recession in Europe. Over in the US, while not being in such bad shape, there still appears to be a lack of catalysts to truly spur growth going forward.

We are not that negative either. While some have called for a major selldown on the market, we are not that negative either. We see Malaysia still avoiding a recession with the Economic Transformation Programme (ETP) if it truly kicks off in a major manner in 2012 to help spur domestic growth through infrastructure spending. Also, Asia as a whole should be able to still avoid a recession. Finally, there is still room for the General Election to provide some short-term trading opportunities.

Maintaining the same list. However, since we expect profit taking to set in for November, we are maintaining the same defensive stock list of Axiata, Petronas Gas, Telekom Malaysia, AirAsia and KPJ Healthcare. We expect these five companies to report relatively resilient earnings as well during the 3Q2011 results reporting season.

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