More volatile market seen for H2

THE local stock market appears to be set for more volatility in the
second half of this year as the melange of weak overseas economic
conditions and looming local polls continues to have a huge impact on
investor and trader sentiment.
The 30-stock gauge of the local
bourse, the FTSE Bursa Malaysia KLCI hit its all-time high of 1,635.96
on July 19, setting the pace for a healthy uptrend for the second half
of the year.
However, it has since dropped to 1,625 points and
expectations are that it could go lower amid the frothy global economic
and political landscape.
A fall below the 1,620-point level,
according to one technical analyst, would signal the end of the upward
wave from the 1,526.60-point level recorded back on May 18.

[You must be registered and logged in to see this image.] Wong: ‘I will place priority on dividendyielders and defensive big-caps with exposure to index-linked counters’. “For
now, it is quite clear that the market is in a critical condition and
may slip into a coma anytime... Once comatose, we will have to wait
until it wakes up again,” he quips.
Still, market experts are keeping their fingers crossed.
For
one, from a fundamental point of view, they point out that another
round of quantitative easing in the United States in order to stimulate
slowing growth could possibly happen, enabling a healthy flow of funds
into global markets including in Malaysia.
In fact, there is
still plenty of liquidity sloshing around as a result of earlier
stimulus packages by global central banks to pump up ailing economies.
This has enabled foreigners to remain net buyers of Malaysian stocks
for eight straight months up to May, according to latest data.
Granted, foreign money can leave a country as fast as it comes in, especially in a negative economic environment.
Global
liquidity rush aside, locally, the usual suspects comprising feel-good
factors, if not some uncertainty attached to the general election (GE)
and the Economic Transformation Programme should continue to help
hopeful investors find some solace.
The macro perspective
That said, challenges remain plentiful from the wider economic perspective.
For
starters, recent US economic data comprising weaker retail sales and
lower job growth are pointing towards a slowing economy.
According
to latest data, retail sales in the world's largest economy, fell for
the third consecutive month in June. Although a marginal 0.5%, the
United States has not had three consecutive falls since the height of
the financial crisis of 2008.
Latest figures also showed that
companies created an average of just 75,000 jobs per month in the April
to June quarter, which is reportedly a third of the monthly job growth
in the quarter before it.
On top of these, the coming
presidential elections as well as the fiscal cliff where a host of tax
will be increased and automatic spending cuts kick in scheduled for the
end of the year, are also threatening to post more uncertainties to the
US economic growth trend.
Over in the world's second largest
economy, China, indicators are also pointing to a softer growth trend,
as evident by its central bank's action to cut benchmark lending rates
for two consecutive months last month and this month after four years
of holding the rates steady.
By lowering borrowing costs for
consumers, the government hopes to stimulate spending and economic
activity amid lower inflation.
In the case of the now infamous,
prolonged European Union (EU) debt crisis, experts are saying that the
countries are likely to go through a recession although major central
banks are reportedly in a coordinated effort to boost liquidity in the
ailing bloc.
“This will further complicate efforts to reduce the debt loads plaguing the governments,” Areca Capital chief executive officer Danny Wong points out.
“The
short and long of it is will there be a resolution for the EU debt
crisis will it end in a number of countries breaking away or will it
all end happily ever after?
“Will China's economy maintain its growth rate and will the US economy accelerate, decelerate or stand still?” asks Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose .
China
grew by 7.6% in the second quarter, from 8.1% in the quarter earlier
while the US economy expanded at a pace of 1.9% during the first
quarter of this year.
“The main challenges for the second half
of this year include a possible full blowout of the EU debt crisis due
to political stalemate and/or social unrests on the back of high
unemployment caused by austerity drives.
“Continuous weakness in
major economies such as the United States, China and India may also
post a major threat to emerging markets which are highly dependent on
exports,” says Areca's Wong.
Locally, the GE outcome will be the focus of the investing community, he notes.
Market strategy
In such a market like this, Wong is choosing to go mainly defensive with a focus on high dividend-yielders.
“I
expected a rally in the first half. I repeat my view that the local
market may continue its mild uptrend, at least for the immediate term,
but this time it faces more uncertainties as the market is pricier now
compared to six months ago,” he says.
Trading at a
price/earnings (PE) ratio of over 15 times, the local bourse is more
expensive than most of its counterparts which trade at a PE of 12 to 13
times in general.
Wong says he is more inclined to pick stocks
and sectors with clear catalysts and long-term sustainable competitive
advantages, preferably less sensitive to changes in economies.
“I will place priority on dividend-yielders and defensive big-caps with exposure to index-linked counters.
These include stocks under the telco, healthcare, glove, consumer, gaming and plantation sectors,” he says.
That said, he notes that one should be holding “more cash” to capitalise on buying opportunities, post GE.
“Holding a portion of portfolio in fixed income securities such as investment grade bonds is also good strategy,” he adds.
Aberdeen's
Ambrose, meanwhile, says his strategy in a market like this is “the
same strategy as we have adopted for the past 26 years, namely trying
to identify outstanding companies”.
“We find many of the constituents of our model portfolio are exposed to the domestic economy, which remains resilient.
Unlike most of the developed world, you can still get a job and a mortgage here and many have a little more to spend,” he says.
Ambrose points out that the local stock market is quite domestically-oriented and with inflation at only 1.7% last month, Bank Negara has room to slash interest rates to spur further growth.
“Not
many of the big manufacturing exporters are listed which is another
argument supporting the outperformance of Malaysia's market versus its
neighbours.”
If before it was a laggard, the local market has
outperformed its peers in recent weeks, amid much negativity in
overseas markets.
Retail, banking, insurance remain healthy, if not exactly cheap, Ambrose notes.
“On the whole, the market's quite a way above its average PE ratio but not obscenely so.
“My waistline is above its moving average but that is not to say it will not further increase,” he says.
In a report to clients dated July 6, AmResearch Sdn Bhd head of research Benny Chew said the research house had shifted its sector calls with greater bias on cyclicals.
“In
our opinion, the valuation re-rating of the defensive sectors consumer,
select dividend-paying telcos and real estate investment trusts or
REITs has run its course given lofty PEs,” he wrote.
Property is
our contrarian overweight, he said owing to expectations of a strong
return of pent-up demand given the normalisation of the impact of
lending guidelines, continued urbanisation and several prolific
projects.
He said AmResearch remained committed to its year-end
fair value of 1,690 for the market based on an unchanged PE of 15.5x on
current year's earnings, premised on steady earnings momentum by local
firms, high amounts of domestic institutional monies as well as
possible further monetary stimulus globally.
Non-political stocks
For Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong, it is also a defensive strategy that he chooses in the current environment.
The fund manager says Fortress has been relatively defensive since the beginning of the year.
“Stock picks have been non-political stocks that are less sensitive to political headwinds.
“This
year, we very much favour dividend yielding stocks that are supported
by cash payouts and hence should be resistant to price sell-downs. With
a cautious view on the external environment, this defensive strategy
will continue into the second half,” Yong says.
He adds that the
fund house's second half market outlook remains fairly robust but
political headwinds will be at the forefront of investors' minds.
“Speculation on the GE will continue to drive market sentiment.
“If
regional investors remain risk-adverse, the Malaysian market may very
well continue to trade at healthy levels given its defensive nature
historically, supported by dividend yields and domestic consumption.”