Brighter global outlook to drive market

Brighter global outlook to drive market
Business & Markets 2013
Written by Afiq Isa & Shalini Kumar of theedgemalaysia.com
Monday, 03 June 2013 10:13

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KUALA LUMPUR: Last month’s general election, which saw the Barisan Nasional return to power with a simple majority, has generated a halo effect on the stock market.

Buoyed by the election results after months of uncertainty in the market, the FBM KLCI reached an all-time high of 1788.43 on May 14.

Sectorial indices such as the KLSE Property Index and KLSE CONSTRUCTION [] Index also broke their two-year highs, indicating bullish investor sentiment in the two sectors.

A turnaround in global economic sentiment would be one of the key drivers for the KLCI over the next six months, said RHB Research head of research Lim Chee Sing.

“We see the US economic recovery slowly strengthening and Japan is likely to experience a cyclical recovery. There is also market confidence that the central banks will do what is needed to revive economies,” he said.

He said the research house was keeping its year-end KLCI target at 1,815 points as the KLCI is expected to continue to trend upwards, but not without some intermediate hiccups.

“One of the key points to note moving forward will be the US market recovery building in momentum and seeing if the US Federal Reserve will draw back on quantitative easing. This will result in lower liquidity and higher interest rates,” said Lim.


However, he does not expect interest rates to be raised anytime soon, as the low rates attract investor demand in other asset classes, like bonds.

“Interest rates have been sitting at historical lows for a long time, which increases the demand for bonds. This could cause bond prices to spike, causing yields to go down and possibly burst the bond bubble,” he said.

A rise in interest rates could also cause a short-term selldown in equities as returns on bank savings become relatively more attractive than equities.

While Lim said this looks like the most likely scenario for the composite index, the timing is hard to predict.

TA Securities Holdings Bhd technical chartist Stephen Soo also predicted that the KLCI would settle at around 1,891 points towards the end of the year.

“The last correction we saw happened in September last year. There is still some upside to our expectations as the KLCI has seen a lot of upward movement especially after the general election. The market has hit some record highs in a short period of time and this is proving to be attractive to foreign buyers,” he said.

RHB’s Lim said in terms of investment, buyers should look for opportunities in mid to smaller cap companies as many of them had caught up to blue-chips, in terms of valuations.

But Soo cautioned that investors should not get caught off guard pending the US situation. “In the meantime, we should see the market broadening to the mid to small space,” he said.

The market has been witnessing heavy buying among local and foreign investors since May 6, with government-linked companies (GLC) counters leading the way in the wake of the market uptrend.

Share prices of notable GLCs such as GAMUDA BHD [] and UEM LAND HOLDINGS BHD [] have been trading near their 52-week highs, as Gamuda is seen as the main proxy for the Klang Valley mass rapid transit II project and UEM Land for Iskandar Malaysia projects in Johor.

Maybank IB Research said in spite of the property index gaining close to 47% year-to-date, 70% of property counters are trading below their book value per share.

It noted that as large caps shoot up in price, mid and small cap property counters might come into play as investors seek hidden gems.

The research house’s picks for laggard property counters in the mid to small range include MALTON BHD [], PJ Development Bhd, and SELANGOR DREDGING BHD [].

As more counters are marching to multi-year highs, stock picking skills will be put to the test now.

Some analysts said investors should start taking notice of laggard counters with strong fundamentals instead of stocks that are mainly fuelled by the news flow.

“No one is sure if the market is in a bubble until it bursts. When share prices start to reach unsustainable levels, it is time to take a closer look at the fundamentals,” said an analyst.

The analyst noted that since May 6, stock market trading activity showed that gainers outnumbered losers by a wide margin repeatedly upon daily closing, indicating that bulls are in control of the momentum.

“The market breadth ratio between gainers and losers exceeded two on some days, which means that pure speculation activity plays a substantial part in pushing up the gainers,” he said.

Citing glove manufacturer Supermax Bhd as an example, he said the company was affected because its CEO Datuk Seri Stanley Thai had indicated his support for the opposition just before the election. On May 6, one day after the election, investors dumped the stock purely “because of political sentiments, and completely ignoring basic valuation principles”, the analyst explained.

Shares in Supermax have been declining steadily since the fourth quarter of 2012 after the Employees Provident Fund (EPF) pared down its stake in the glove manufacturer. The stock price reached as low as RM1.85 in March.

The counter saw a marginal increase after that following the outbreak of avian flu in China which triggered the possibility of extra demand for rubber glove products.

As for PLANTATION [] stocks, seasonal factors have been having an effect on them. Plantation companies are the obvious laggards given the soft crude palm oil (CPO) prices and the build-up in inventories. Nonetheless, the current share price weakness could well be buying opportunities.

“An improvement in the forecast of CPO prices will result in a rerating of the sector, thus bringing it back in trend,” said the analyst.

Maybank IB Research said lower CPO export taxes initiated this year might prove timely as China’s tighter regulation on edible oil imports may result in higher exports in the short term. Additionally, low CPO prices have the potential of making palm biodiesel economically viable for production.

The research house also said integrated palm oil operators will have an edge over their pure upstream peers as they are less affected by the volatility in CPO prices, singling out SARAWAK OIL PALMS BHD [] as an attractive rebound play.

It pointed out that as Malaysia’s palm oil stockpile recedes in the first half of this year, CPO prices might strengthen in the near future.


This article first appeared in The Edge Financial Daily, on June 3, 2013.