NEW LEVELS: As fundamentals are just starting to improve, earnings still need to play catch up for stocks with rich valuations before the market can scale new heights.
Though the Malaysian economy has experienced a slowdown over the past months as ‘reality began to bite’ in the face of the global uncertainty, it is now on an upward climb reflecting the improvement in economic activities in major economies that include US, the eurozone and Japan.
After the ‘gloom and doom’ that hit global financial markets from August to early October last year, investors’ confidence has rebounded strongly, according to market observations. This was further reflected by global equities which experienced steady recovery since the lows in early October 2011.
Even bond yields in Spain and Italy, the two biggest nations in Europe’s embattled economies, had improved over the past three months.
More importantly, the purchasing manager index numbers for the manufacturing and services sectors in the developed countries, particularly in the US, had started to rebound. Not only was the housing market in the US stabilising, the employment numbers were also rapidly improving.
“Although there are still some lingering concerns on the euro debt crisis, most are being solved. Then we have China’s economy, which could suffer one to two quarters of sharper than expected slowdown, these in our view have largely been factored in by the market,” said RHB Research Institute Sdn Bhd executive director Lim Chee Sing.
“On the balance side, as more signs of stabilisation and recovery in the global economy emerges, we believe investors’ risk appetite will gradually improve as the year progresses,” Lim added.
Lim Chee Sing, RHB Research Institute Sdn Bhd executive director
He further pointed out the euro debt crisis was no longer as threatening as in the fourth quarter of 2011 (4Q11) after the European Central Bank (ECB) opened its liquidity floodgates. Even if there is recession, it is expected to be mild and not likely to drag the rest of the world into a ‘double-dip’ recession.
Having said that, it was believed the market could still suffer a pullback in the near term should political tensions between Iran and the West escalate, sending oil prices soaring.
“This is a wild card and is difficult to forecast although there are mitigating factors such as global oil supply which is not as tight compared with the previous oil shocks,” said Lim.
The major oil consumers represented by International Energy Agency might also decide to release part of its oil stockpiles to cushion any sharp escalation in oil prices.
According to Lim, a key event that would have significant bearing to the equity market on the local front was the impending general election (GE). There were strong market expectations that the country’s GE would be held any time soon.
Given what happened during the previous GE on March 8 in 2008, where the ruling coalition, Barisan Nasional (BN), lost two-thirds majority, there were fears that if BN were to lose a simply majority, the local bourse could suffer a major temporary setback.
This was on account of uncertainty in the continuity of the country’s economic policies that could slow down the implementation of the Economic Transformation Programme (ETP).
Lim, however, believed that the likelihood of this happening was low. What the GE would mean for the portfolio investors was ‘volatility’ in the local bourse given the uncertain election outcome.
“We believe market reactions would likely be similar to the recent Sarawak state election, whereby investors reduced their equity exposure upon the announcement of the dissolution of the state assembly, causing the market to fall into a correction mode. The market, however, recovered quickly after the state election as BN retained its two-third majority,” he added.
Nevertheless, as fundamentals were just starting to improve, earnings would still need to play catch up for stocks with rich valuations before the market could scale new heights.
“Consequently, the risk of market pullback and consolidation in the near term is still high although we believe that any volatility in the market would provide opportunity for investors to accumulate fundamentally-robust stocks on weaknesses,” said Lim.
The research firm was also turning more positive on cyclical sectors that were poised for recovery, although investors’ risk perceptions could still change very quickly should the situation turn out to be worse than expected.
As a result, it recommended investors to hold some defensive stocks that had strong cash flow to pay sustainable dividends.
BizHive Weekly takes a closer view at a few selected sector reports done by research houses as well as technical outlook on FBM Kuala Lumpur Composite Index (KLCI).