Market overreaction presents buying opportunities

Personally I like FABER...

Election jitters
KLCI: 1,635.6
(2013 Year-end Target: 1,750 points)

Election rumor surfaced again. Yesterday, the FBM KLCI reacted negatively to a rumor that the Prime Minister may soon seek consent from the Yang di-Pertuan Agong for the dissolution of sitting Parliament as early as this week. If it turns out to be true, the GE13 will most probably be held by March 2013. Pursuant to the previous GE12, the current parliament must be dissolved the latest by April 28 2013.
Jittery investors offloaded over the prospect of stronger opposition post GE13.
The FBM KLCI dropped 2.43% to close at 1,635.63, slightly off its low of 1,630.99 points as tepid bargain hunting activities capped further losses during the afternoon session. Trading volumes jumped to 1.83b shares, circa 46% percent above its year-to-date daily average of 1.25b. The selloff was likely triggered by jittery investors who worried the GE13 will result in a feebler incumbent and a stronger opposition. It was argued that the situation would potentially hamper government’s planned investments as contained in the ETP and 10MP.

Recent poll survey results favorable to incumbent. Nonetheless, according to the Merdeka Center for Opinion Research vide its latest report dated January 10 2013, the Prime Minister’s overall satisfaction rating has improved by 17%-pts to 63% in December 2012 from mere 46% which was recorded in March 2008. Likewise, 52% of the latest survey respondents believe the country is moving in the right direction as compared to only 45% in the months following the GE12 in March 2008.

Incumbent to regain the coveted 2/3 supermajority?
Hence we believe that the incumbent government would not only retain its majority seats in the parliament pursuant to the upcoming GE13, but it may also improve on its performance over that of the previous election. During the GE12, the incumbent won 140 seats or 63% of the total 222 seats. In order to reclaim the coveted 2/3 parliamentary majority, the incumbent would have to win additional 8 seats or nearly 6% more than what it won in the 2008 election. Based on the above opinion polls, we would not be surprised if the incumbent were to regain the supermajority. The Prime Minister himself was hopeful of this possibility as he had said last month that his coalition should endeavor to regain the 2/3 majority it lost in GE12.

Found neither pre- nor post-election correlations with the equity market.
As stated in our previous reports, we
have not found any strong correlation between the broad equity market trend performance vis-à-vis the build-up to a general election. Similarly, examining the market response post-elections also yielded the same lack of trend correlation. In fact, performance of the incumbent in the general election also has no statistical bearing on the market trend.

FBM KLCI continued to broadly track the trend direction of regional indices.
Our empirical analysis shows that, in the past, the performance of FBM KLCI generally tracked the broad trend direction of regional indices, both preand post-election. While the local market performance may temporarily decouple from the rest of the region, it would soon re-track the broad regional trend direction. Even after the arguably watershed GE12 results, the local benchmark continued to broadly track the regional trend direction.

We believe the election risk is unduly over emphasized.
We believe that investors may have over emphasized on the election consequence. We view that the likeliest of result is that the status quo would remain. Hence, this presents an opportunity to investors with the risk tolerance and who shares the similar view. We reiterate our view that the Construction sector will revert to its appropriate valuation after the GE13. Its current undemanding valuation should be an attractive proposition for investors. We also believe that the media sector will be an indirect beneficiary to the upcoming GE13. For media, it is all about news cycle-refresh. The election will provide plenty of news to be reported, driving readership and consequently adex.

Confident sanctity of contracts will be upheld.
Nevertheless, we do not totally discount the risk of an unexpected outcome to the GE13. If that were to transpire, we are confident that the on-going government projects would not be renegotiated, postponed or scrapped off. We believe that either party that won the election mandate will honor the sanctity of contract. The negative repercussion of unilateral amendment or, worse still, cancellation of awarded projects will be tremendous especially from the viewpoint of foreign investors. Besides, most of the ongoing major infrastructure projects have been awarded on open-tender basis. Hence, we do not expect any delay or postponement of the awarded on-going projects. We believe that should there be any re-examination at all, it would be confined to future or planned projects only.

Reiterate FBM KLCI 2013 year-end target.
Assessing our coverage universe pursuant to yesterday’s selloff, it was quite apparent that among our BUY-rated stocks, property counters were among the hardest hit. We believe the market overreacted and will soon find support at the psychological 1,600 points level. Hence the above list of 10 stocks present compelling trading opportunities. At the same time, we reiterate our FBM KLCI 2013 year-end target of 1,750 points.

Source: MIDF-Research, 
Publish date: 22/01/13