KUALA LUMPUR: OSK Investment Research has raised its KL Composite Index (KLCI) fair value from 960 to 1,040 on a higher price-to-earnings ratio (PER) of 16 times.

In a research note issued on May 4, it said investor exuberance could well take the market towards the 1,118-level, which was 16 times 2010 earnings.

“Nonetheless, we believe the overall upside is limited in the longer run and our advice is for careful stock picking with focus on CONSTRUCTION [], oil and gas (O&G) and building material sectors,” it said.

OSK Research said while it expected the KLCI to rally in early April, the pace and extent of the rally certainly took its surprise. Its expectation of profit taking setting in at end-April also did not fully materialise as there was only a shallow three-day dip despite the outbreak of the swine flu.

“As such, given the 118 points or 13.6% rise in April alone, we still believe that the market may be in for a correction. Nonetheless, the technical indicators and the flood of liquidity in the market would seem to indicate that there is still more upside before a correction sets in,” it added.

OSK Research said while the rise in the KLCI had tracked the global markets that strengthened as investors chose to focus only on positive economic data while ignoring the negative, Malaysia had her fair share of market moving news.

Globally, markets seemed to be of the view that the economic contraction was close to a bottom and a recovery was likely at end-2009. Local investors also greeted the smooth handover to the new Prime Minister and the subsequent announcement of liberalisation measures with much enthusiasm.

“In January, we had cautioned that there could be one more market correction in May and that it would be the ideal time to buy. While a correction as still likely, the  increasingly positive sentiment worldwide prompts us to view any market dip as a chance to Buy into Weakness.

In its recap, the research house said it was raising our KLCI fair value from 960 to 1,040 pts on a higher PER of 16 times. Investor exuberance could well take the market towards the 1,118-level, which was 16 times 2010 earnings.

“Out of our top five picks for April, only Tanjong underperformed. We now switch to a more aggressive strategy with 5 higher beta stocks. MMC, MRCB and Mudajaya should benefit from our view of more second half 2H stimulus packages,” it added.