FBM KLCI to continue 2010 rally into 2011

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KUCHING: The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) is expected to scale new heights in the coming year; a continuation of the 250-point rally experienced in 2010.

CONTINUED RALLY: Photo shows part of the Bursa Malaysia building in the nation’s capital, Kuala Lumpur. The FBM KLCI may extend its strong rally from 2010 into the upcoming year. – Photo by baincardin.com

In its research report, OSK Research Sdn Bhd (OSK Research) stated its 2011 KLCI fair value at 1,648 points premised on 16 times price earnings ratio (PER) on 2011 KLCI earnings.

This provided an upside of some 10 per cent on the benchmark’s current level and the research house saw the local bourse scaling higher by three key factors; earnings, elections and easing, colloquially known as the ‘3Es’.

The research house was of the opinion that the fundamentals had to be intact in terms of listed companies in Malaysia being able to report net profit growth in the coming months in order for the market to trend higher in 2011.

On this aspect, the KLCI components’ net profit growth for 2010 rebounded strongly with a 26 per cent growth rate after contractions in the two previous years.

For 2011, the research firm suggested growth moderation to 16 per cent. In addition, almost all sectors were expected to post decent growth in the coming year, with the exception of the steel sector as the change of industry structure to a quarterly pricing for iron ore would limit ironmakers’ ability to benefit more from spreads.

The simultaneous effect from this would also mean steelmakers faced muted volume growth and margin normalisation.

OSK Research saw growth for sectors such as banking, consumer, healthcare and property continuing into 2012, in what it termed ‘quality growth’. The mooted growth figures for most sectors in terms of net profit (excluding the consumer and steel segments) were in the 10 per cent region.

More importantly, it believed that upgrades could dominate again either starting in the fourth quarter of 2010 (4Q10) or the first quarter of 2011 (1Q11). Thus, the research firm felt that 2011 corporate earnings would be a factor fuelling the market rally to new highs.

On another note, the research house noted that there had been a market rally sometime in the prior six months in six out of the last eight elections and expected the impending election to be no different as part of the confidence-building ahead of a general election was the ‘feel good’ factor in the stock market.

In the run-up to an election, the construction and property sectors would be the usual beneficiaries from a positive news flow. Specifically, Sarawakian players might race ahead of the broader market as Sarawak state elections were still generally seen to be held ahead of the general election.

The quantitative easing (QE) programme currently carried out by the US, UK and Japan would see knock-on effects in Malaysia via the form of flush liquidity, which was set to continue for the early part of 2011.

This scenario would see a return of foreign interest on the back of a stronger ringgit and the government’s proposed economic reforms.

Despite the research house identifying some tightening measures amongst Asian economies given their stronger growth and moderate inflation, it believed the US and Japan would have no choice but to suppress their interest rates for an extended period.

Thus, it concurred that money would find its way to Asia due to the region’s stronger fundamentals as well as higher interest rates.

On a regional basis, the local bourse would still be a magnet based on the nation’s decent year-to-date (YTD) gains of above 17 per cent, although Indonesian, Thai and Philippine markets recorded YTD gains of more than 30 per cent.

Nevertheless, the research house was of the opinion that foreign investors would look towards the FBM KLCI as they broadened their horizons to cheaper markets.