KLCI – In A Value Trap!

We are in un-chartered territory. It is very seldom that we see confluence of political uncertainty, policy flip flop and rising risk of stagflation come into play. Stock futures slid, putting benchmark indexes on the brink of a bear market, as an almost $3- a-barrel jump in oil dimmed the outlook for corporate profits and more analysts reduced earnings estimates for banks.

If the KLCI’s PE of 12x represents the 10-year-through, of which effectively keep KLCI year-end index at around 1,200 level, perhaps we may be little bit of too confident of ourselves in riding through this storm.

Billionaire investor Eli Broad said the U.S. economy is in the ``worst period'' of his adult life as a housing market recovery remains ``several years'' away. ``This is worse than any recession we've had since World War II,'' Broad, 75, said in an interview recently.

The problem is most people don’t believe prices have bottomed out as consumer confidence and home sales ebb. Redemption fears are mounting, as political newsflow momentum continue to be in the state of flux, on top of runaway inflation and knock-on impact on windfall taxes. At an average of RM1.1bn in the last two weeks, the market’s average trading volume is collapsing to a 5-year low. The rise of more than 100bps of the benchmark 10-year MGS in the past month has historically not been a favourable backdrop for the equity.

The mid-term review of 9^th Malaysia Plan also failed to provide much excitement to markets. Until March 2008, gross development spending of RM81.6bn represented 40.8% of the original RM200bn 9^th MP allocation.

The best strategy now is to ‘STAY INDOORS’. Hold cash, and lock-in with commodity-related foreign currency deposits. Potential bottom fishing opportunities only if the index is down below 1,050 and that only because the KLCI is supported by gross dividend yield of 5%. I like the cash-rich large caps with desire to raise the dividend payouts taking advantage of a single-tiered tax system, ideally backed by share buybacks. Forget about the small-mid caps as the valuations continue to be depressed at single-digit prospective PS multiples, even though the small-mid cap index has fallen almost 23% from its peak.

Sector wise, I stay overweight on no-brainer consumer, REITs, steel, oil & gas and plantation. At the same time, I begin to warm up on gaming, partly because of steep drop in the share prices and partly on hope that the coming budget will not raise duties on it.