Market Strategy

Market Strategy

Market Uptrend shifts into higher gear?


§ So far so good in 2012. Local benchmark index has inched up 2.9% ytd which is in line with our expectation that market could rally in early 2012 (our 2012 market outlook report issued on 20 Dec 2011). Also, the local bourse has climbed 18% since Sept/Oct 2011 rebounding from the FBM KLCI’s 16% decline from the all-time high of 1595 points in July to as low as 1332 points in Sept last year as a result of the onset of Euro debt concern.

§ Market climbed back to pre-crisis level…... Local bourse successfully breached the pre-Lehman crisis’ high of 1516.2 points which is in line with other Asean indices such as Jakarta Composite Index, Philippines Composite Index and Thailand SET Index.

§ ……..Not quite for the developed market indices. However, developed market bourses such as DJIA, S&P 500, Hang Seng Index, Singapore Straits Times are still not recovered back to their pre-Lehman crisis’ high although we have witnessed the DJIA rose above 13000 (still shy of pre-crisis’ high of 14164.5 points) and S&P 500 breached the 1400 psychological level (but shy of pre-crisis’ high of 1565.2 points).

§ Market is boosted with better investment sentiment compared to last year thanks to temporary relieve of Euro debt crisis pursuant to the successful of Greek debt swap which avoid any devastating default and US economic recovery remains intact following the better-than-expected US job data and housing starts. Furthermore, we have witnessed the recent upgrade of corporate earnings for 2012-13 following the 4Q11 results and hence, the target benchmark index for end-2012.

§ Thin volume for recent market rally. We notice that local market rally for this time is absent with any heavy trading volume as opposed to previous market rally in 2007 (pre-Lehman crisis) and 2009 (driven by strong market liquidity as a result of introduction of QE). Thus, we doubt that current market rally could shift into higher gear going forward.

§ Capital might flow back to US to capitalise on US economic recovery. Whilst we reckon that US economic recovery remains intact which would spur the regional market, we think that upside of the local market is quite limited as foreign funds would flow back to US market to take advantage of the cheap market valuation (as US corporate earnings growth are trending upwards with relatively lower PE). As highlighted earlier, local market has climbed back to pre-crisis level whilst these are not the case for DJIA and S&P 500 which have more rooms to trend higher.

§ Current uptrend may not be sustainable as risks remain to the downside. We are still not convinced that current global condition is out of the woods and expect local bourse to trade sideways with a negative bias or even a mild correction in coming 1-3 months as risks remain to the downside.

§ Few key concerns still impede market rally
- a) spike in oil price which could derail the US and EU economic recovery,
b) policy implementation risk in EU,
c) slowdown of Chinese economy,
d) lack of fresh liquidity to further drive the market, and
e) heightening political risk.

§ Spike in oil price. Oil price has increased by 41% from US$75.7 in Oct 2011 to current level of US$106.7 as a result of high political risk premium caused by the tensions of whether Israel will launch a pre-emptive strike on Iran’s nuclear facilities and civil unrest in Syria. Our view is that oil price will remain stubbornly high following the recent non-military sanction by western nations on Iran although the current physical oil supply exceeds the demand.

§ Policy implementation risk in EU. Although the current massive liquidity injections in the Euro zone has temporarily stabilised the devastating default of debt-ridden nations, we foresee that some debt laden nations might have difficulty to stick to the austerity measures as required by the ECB as these nations started to feel the pinch of deficit cutting, which could further depress the economic recovery. For example, we have witnessed Spain’s defying of deficit reduction target. Furthermore, the mighty Germany will lose its patience to tolerate with these nations and the easing monetary policy pursued by the ECB. Thus, the ECB might not have leeway to further pump in liquidity to bailout any sovereign debts should the next nation in deficit fallout.

§ Slowdown of Chinese economy. Chinese Prime Minister Wen Jiabao unveiled a GDP growth target of 7.5% for 2012 after six years of keeping the target at symbolic level of 8%. The reduction has been seen as an admission that the country’s economy must rebalance away from its extraordinary high investment and low domestic consumption mix. Key concern will be on possibility of China’s hard landing this year (as market already speculated that China’s GDP growth might below 7.5%) judging from the recent lacklustre of Industrial production growth, car sales, real estate investment.

§ Lack of fresh liquidity. We do not foresee any fresh liquidity to swing the market upwards as Federal Reserve is unlikely to introduce a full scale of QE3, at most, the lesser impact of sterilised QE3 to pressure down the long term bond yield following the fear of oil-led inflation and US economic recovery is already well on track.

§ Heightening political risk. With the distribution of RM500 cash handout under BR1M at the tail-end, announcement of 7-13% pay rise for civil servants, step down of Sharizat as minister over the issue of ‘cow and condo’ and soon-to-be-announced minimum wage policy, we believe the General Election (GE) is around the corner, probably during the school holiday in May/June 12. Market could soften approaching the upcoming GE as investors will be wary of the polling result as domestic political landscape has changed significantly since ‘political tsunami’ in 2008.

§ We are neutral to local bourse and still stick to our end-2012 FBM KLCI target at 1560. Our end-2012 FBM KLCI target is at 1560 based on top down valuation, which implies 14.0x 2013 P/E (between –1 standard deviation and mean P/E).

§ We continue to advise investors to stay defensive, overweight on sectors such as telco, consumer, concessionaire and M-REIT before we turn optimistic on 2H12 by looking at cyclical sectors such as technology, shipping and property.

§ Still some trading opportunities in thematic stocks. We reckon that sectors such as construction and oil & gas which could benefit from the strong newsflow of ETP projects in the likes of KVMRT, refinery and petrochemical integrated development in Johor, river-of-life project in Klang Valley and Petronas’ marginal oilfield spending.

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