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 KUALA LUMPUR (July 22): With Bursa Malaysia on a long winning streak and the FBM KLCI soaring more than 30% from mid-March, it is evident that a technical bull market has emerged.

At the close of trading yesterday, the benchmark index stood firm at 1,595.93 points, even surpassing many research houses' year-end targets, which had taken into account the ample market liquidity factor.

The highest year-end target among the research firms is 1,580, made by RHB Research Institute.

But even as the bullish momentum continues, a rising number of market analysts and fund managers think the market is due for a pullback, with the downside risk getting higher as the KLCI climbs higher.

MIDF strategy head Kifni Kamaruddin, in predicting a market correction soon, pointed to the severe disconnect between the stock market and economic fundamentals currently.

Kifni is not as optimistic about an economic recovery as the liquidity-driven equity market is implying.

"We alluded to a similar sentiment to Bank Negara Malaysia by asserting that rising financial conservatism among households and businesses may be counterproductive to economic recovery efforts. In a gist, while the macro performance may have seen its worst, the ensuing recovery may not be swift," he said.

TA Investment Management chief investment officer Choo Swee Kee, meanwhile, pointed out that the performance of the local benchmark is currently highly skewed towards the glove component stocks.

As such, he said: "The market will correct whenever the glove stocks correct as the glove stocks are at a lofty level."

Malacca Securities Sdn Bhd head of research Loui Low concurred with Choo, but said it is possible that KLCI's slide would be cushioned by further gains in glove stocks.

Low thinks a major decline in the benchmark index would only come if functional Covid-19 vaccines are discovered.

"If not, we may see just a mild correction in the near term," he said.
Making use of put warrants

Amid the growing view that the local stock market is set for a correction, both Kifni and Low think that the KLCI index put warrants can serve as a viable tool to short the market or as a hedging tool for existing long positions.

As Kifni put it: "Buying put warrants is a good hedging strategy against downside risk to underlying long position. At the same time, investors would continue to enjoy any upside gain to the underlying long position."

TA's Choo, however, warned: "We don't invest in call or put warrants as either it is illiquid and/or its premium is expensive."

Other than taking into consideration of the directional views, most warrant specialists have attributed liquidity as the most important factor to be considered before investors choose to jump into such leveraged instruments.

In a nutshell, liquidity is determined by the bid and ask volume of a certain counter, as well as how narrow or wide the bid and ask spread is.

Based on data compiled from Bloomberg since June, there is no apparent trend that the KLCI put warrants have been attracting investors' interest, as their daily trading volume remains sporadic.

Meanwhile, it is worth noting that money flowing into these instruments remains scarce, as the average daily turnover for the most traded KLCI put warrants is about RM1.09 million per day.
What stocks can be considered next?

Commenting on the stocks to look out for from now, Choo said: "Investors have to take a strong view on whether the Covid-19 pandemic would continue or not. If Covid-19 continues to ravage on, buy gloves and healthcare. If Covid-19 subsides, then the countercyclical sectors would be tourism and airlines."

Kifni, meanwhile, noted: "If investors insist on taking a fresh long position now, we advise on stocks with defensive earnings coupled with attractive dividend yield."

Low added: "Other than defensive, net cash counters, reopening theme and tech automation counters could be considered."