Tread with caution as year of the tiger beckons.
We believe there is still money to be made over the next few months although the market is looking increasingly toppish. The selldown in January does present trading opportunities on the rebound with smaller cap stocks expected to also benefit from the traditional Chinese New Year rally (see our February strategy outlook report dated 2 Feb). In addition to rising expectation of better corporate
results to be announced this month, the following factors should keep market sentiment positive in the medium term:
(i) the unveiling of the Government’s New Economic Model;
(ii) the award of more construction and infrastructure-related contracts as per the development spending allocation for 2010; and
(iii) robust capital market activities, including the upcoming listing of JCY on the Main Market.
We also note that the majority of institutional funds that we presented to during our marketing rounds over the past 2 months concurred with our view that the market’s bullish streak should probably extend until 2Q2010. This is before sentiment turns cautious with global markets likely to see the ripple effects of tightening policies in 2H2010. Already, the tell-tale signs have emerged, with China imposing credit restrictions on loans to stem the tide of easy money while US President Barrack Obama, in a largely unpopular move, has proposed to limit the activities that investment banks are able to conduct beyond their traditional lending business. Industry observers and economists view the curtailment on banks as having negative ramifications for the economy as a whole over the long term.
Stock picking in year of the tiger. Our investment strategy for small cap stocks does not differ greatly from our broader investment strategy for 2010. We continue to advocate selective stock picking along the lines of our key OVERWEIGHT sectors of oil & gas/construction/steel, although investors should progressively pare down their holdings in favor of more defensive names in 2H2010 when market conditions are likely to be less conducive on the back of the tightening measures. Our preferred small cap picks, distilled from our January/February outlook reports, comprise sector thematics and stocks whose valuations remain compelling vis-à-vis their growth potential that also boast decent dividend yields.
These are
ALAM (BUY, TP: RM2.99),
LIONIND (BUY, TP: RM2.51),
SUPERMAX (BUY, TP: RM7.94),
SUPERMAX (BUY, TP: RM7.94),
HAI-O (BUY, TP: RM8.95) and
NAIM (BUY, TP: RM4.12).
