In its market outlook, the research firm said gains may be capped in the fourth quarter of this year owing to cautious sentiment.
A possibility of US rate hikes coupled with a reduction in the US Federal Reserve's balance sheet are affecting global sentiment.
"There is a possibility of exodus of foreign funds from emerging markets to the US as yield spread of US Treasury narrows against MGS. Furthermore, there will be a sizeable maturity window in 4Q (c.RM21b) from scheduled MGS/GII maturities," said the research firm.
There is also concern in China as a long period of growth has put pressure on asset prices and corporate and household debt levels are rising rapidly.
JF Apex Research also believes there could be profit-taking during the upcoming general election, which it expects to be in March/April 2018. It said the market has already factored in the upside of the ruling government winning another term, and hence may choose to sell down on equity owing to unfavorable risk-reward.
Weak corporate earnings could also weigh on the bourse as valuations are high but tthe downside risk could be mitigated by the ample domestic liquidity.
In terms of its funadamentals, the research firm said the current market valuation is fairly priced at 15-16x forward price-earnings (PE), close to its historical mean PE of 15.2x.
From a technical standpoints, the indicators are negative, having failed to breach the resistance at 1,800 points and leading to a selldown. The index has remained in the downtrend channel since September.
"Whilst we are still positive on the market outlook for next year, we are mindful that the ‘10-year downcycle’ (i.e. Black Monday in US in 1987, 1997/98 Asian Financial Crisis, 2008/09 Global Financial Crisis) could haunt the market, especially with the current all-time high in Wall Street," said JF Apex Research.
"Having said that, the market usually exhibits a strong rally ahead of any perceived market crash that could happen."
The research firm suggested that a bottom-up approach in stock-picking will prevail over the longer term by ignoring market noises and risk-on risk-off trade.
It added that investors should adopt a combination of defensive and active investment strategies via purchasing value stocks that are trading at lower price relative to their book value and earnings; growth stocks; and high-yielding stocks with resilient business models.
"Our top picks under coverage are: Gadang (Target Price: RM1.50), Ikhmas Jaya (Target Price: RM0.80), Padini (Target Price: RM4.62), Top Glove (Target Price: RM6.85), LBS (Target Price: RM2.27) and HeveaBoard (Target Price: RM2.12).
"Our picks on value stocks are: Maybank, Tenaga, Sime Darby, Genting Malaysia; growth stocks include: Pestech, GHL, OKA, OCK, Press Metal; high-yielding stocks such as: Magnum, IGB Reit, Carlsberg, Heineken; and other small-and-mid cap stocks such as Tiong Nam, SCGM, Sasbadi, Scientex, Lii-Hen, Aeon Credit, Syarikat Takaful, YINSON, Tasco (Target Price: RM2.81), Engtex (Target Price: RM1.60), Titijaya (Target Price: RM2.06), Kim Loong (Target Price: RM4.59) and C.I. Holdings (Target Price: RM2.61)."
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