KUCHING: Malaysian investors are urged to ride on the waves of volatility in the equity market given that the ‘zig-zag’ side trend will be a window for informed-investors to jack-up maximum returns through intraday or short-term trading.
STRONG DRIVERS: Low says short-term volatility in the market will provide retail investors the opportunity to accumulate but they should remain cautious of sudden reversal.
Hong Leong Investment Bank Bhd’s (HLIB) head of research Low Yee Huap told The Borneo Post that the best tactical play now was to ‘ride with liquidity but be aware of pitfalls’ which means investors should remain cautious of a potential reversal of quantitative easing (QE) or short-term volatility.
He further pointed out the global growth was still holding up well despite the waning of stimulus. However, there was a possibility for advanced economies to adopt more QE if growth falters. “The current global outlook may seem fragile but it has managed to stay afloat and the possibility of a double dip is unlikely,” he said during the Bursa Malaysia’s MarketChat 2010/11 in Kuching.
On the equity market front, Low projected the Kuala Lumpur Composite Index (FBM KLCI) to reach its highest at 1,720 based on the 15 times 2012 earnings. This was underpinned by the four major drivers for the market – economic and earnings growth, domestic news flow, liquidity inflow and ringgit as well as asset bubble and reflation.
However, he also warned that there was a possibility for the market to retreat to its lowest at 1,450. “This is a very strong reversal signal but it has not been confirmed yet. For long-term investors, it is still not the right time to go into the market. Retail investors do not necessary need to be in the market but when there is a significant dip, that will be the best time to make full use of the opportunities.”
Moving forward, Low pointed out that the pace of rate normalisation in Malaysia was still ahead of the curve at 50 per cent compared with other emerging countries like China (34.7 per cent), Thailand (33.3 per cent), Korea (33 per cent), Indonesia (four per cent) and the Philippines (zero per cent).
Meanwhile, on the economic front, he revealed the corporate earnings expanding for 2011 and 2012 were expected to be at 13.7 per cent and 9.9 per cent respectively. “The figure for 2011 was down by 1.1 per cent from 14.8 per cent because of the disappointing reporting season. Though slower, it is still a double-digit earnings growth that will drive 2012 price earnings down to 13 times and that should make stocks more valuable.”
“One of the favourites is the banking sector which is always the best proxy, followed by the aviation and telco sectors. These are the three sectors which which will grow along with the nation’s economic and earnings growth,” he highlighted.
During the MarketChat, Low also touched on the Economic Transformation Programme (ETP) and the 10th Malaysia Plan (10MP), which are known to be the best drivers for the market. “All this news flow about reforms and execution is positive. However, it does not mean that it will take effect immediately. Based on the history, countries that do reform will basically take two to three years to see the transformation.
“We are expecting to see several hiccups during reform but this time around, the Malaysian government has done very well by making things go through and the public is well informed. The main sectors that will benefit from this turnover are construction, property and those that are involved in the steel businesses,” he added.
For the oil and gas (O&G) sector, there would be more contracts from Petronas coming along the way as the national O&G corporation had announced that it would be focusing on the marginal fields in Malaysia as well as the recent news which reported that it would be raising its capital expenditure from RM40 billion to RM50-RM55 billion a year within the next five years.
During the announcement of its quarterly results recently, Petronas president and chief executive officer Datuk Shamsul Azhar Abbas said that significant capital expenditure would be required to maintain the future integrity of its ageing assets and the company would continue to delivery strong underlying performance in the third quarter despite rising costs as well as the impact of strengthening ringgit against the US dollar.
As a result, Low expected that there would be a lot of corporate exercise activities such as mergers and acquisitions (M&As) coming up from the local O&G players. “This will create a bigger opportunity for companies to take up larger contracts in the time to come. Besides that, O&G sector is also the largest contributor to the ETP in terms of investment by 2020.”
On the liquidity inflow and ringgit front, foreign shareholding had gone up from a low of 20.3 per cent in May to 22 per cent in January this year but this was still below end-2007 of 26.2 per cent and peak of 27.5 per cent in April 2007. “Inflow will be further augmented upon diligent execution of transformation. This will help push the level to go up further and unlikely to back to what it was before.” said Low.
In terms of foreign funds, he pointed out that for the first time since June last year, foreign institutional players were net sellers amounting to RM3.4 billion in February 2011 versus RM0.1 billion net buys in Jan 2011.
“However, judging from overnight surplus liquidity, fixed income market and ringgit strength, most of the money is still in Malaysia. If you look at the buying and selling of the local institutions in terms of volume, it does not really match with the foreign institutional play but they have been supporting the big caps,” he explained.
On the other hand, Low also revealed that asset bubble and reflation had flushed liquidity in the world and surplus liquidity domestically, which resulted in financial demand for commodities and properties. “As such, creation of two larger property companies at higher valuations versus relatively low valuations of smaller players will make the sector more compelling amidst asset reflation.”
In summary, he urged investors who were keen to invest in the market to ride on the liquidity wave as long as the US was in a ‘sweet spot’ but be aware of pitfalls, the potential liquidity reversal or trade sanctions in later part of the year.
“I expect Bank Negara Malaysia (BNM) to increase its overnight policy rate (OPR) by 25 basis points in this coming May or July, provided the growth comes in. BNM said in a recent statement that it is expecting growth to be stronger in the second half and demand driven inflation to come through more,” he concluded.
On Friday, BNM made an announcement that it would increase the statutory reserve requirement (SRR), or the amount that banks keep with the central bank, to two per cent from one per cent effective April this year. The higher SRR was estimated to mop up roughly RM7 billion from the banking system.
HLIB’s stocks picks with target prices were Sime Darby (RM10.75), Maybank (RM10.20), CIMB (RM9.58), Boustead (RM7.87), KSL (RM2.38), AirAsia (RM3.50), HSL (RM2.44), Mudajaya (RM6.64), IOI (RM6.62), Telekom (RM4.20) and Time DotCom (RM0.95)