External factors, disasters, upcoming elections set up the stage for an ‘interesting’ 2Q
KUCHING: Moving into the second quarter, market observers concurred that while there would be a possibility of some short-term volatility for the remainder of the year, market fundamentals should remain sound with an eventual rally close to year’s end.
After being hit by a few ‘Black Swan’ events, markets rebounded in March with the Kuala Lumpur Composite Index (KLCI) concluding the first three months of the year in the black.
Chris Eng, head of research for OSK Research Sdn Bhd (OSK Research), was particularly enthusiastic.
“As stated in our earlier report, we believed that the KLCI fundamentals were intact; thus, had called on investors to buy into ‘weakness’ as we envisaged a rebound in the market. Further on, while we foresaw some volatility, we introduced our 2011 KLCI year-end 1,680-point target in our March outlook report and retained the same ‘buy on weakness’ call.
“Thankfully, that call proved correct,” he wrote in an e-mail note yesterday.
Earlier market consensus had hinted that the upcoming 10th Sarawak State Election this April 16 would boost state-linked stocks, namely those in the timber, construction as well as oil and gas (O&G) sectors. Further, the perspective would be further underpinned by projects slated for the ambitious Sarawak Corridor of Renewable Energy (SCORE).
“For March, timber stocks were actually the big winners, including names such as Subur Tiasa, Jaya Tiasa, Ta Ann, WTK and Lingui, on hopes for better timber demand in view of reconstruction efforts in Japan.
“Among the FBM100 constituents, O&G giant Petronas’ companies Petronas Dagangan Bhd and Petronas Chemicals Bhd were the big winners,” Eng explained.
On the recent disaster that struck Japan and China – the nation’s two top trading partner – the head researcher noted that despite earthquakes in Kobe 1995 and Szechuan in 2008, both economies did not suffer any major setbacks in those years from these natural disasters while the impact on the country’s economy was minimal.
“Our house view is that the Malaysian economy will grow by some 5.8 per cent, with growth rates ticking higher in the second half to between six per cent and 6.7 per cent in the third and fourth quarters, respectively. Led by Bloomberg’s data, we see that the KLCI price-earnings ratio (PER) had tended to lead gross domestic product (GDP) growth by one to two quarters. As such, we see no reason for PER compression in the coming months,” he elaborated.
For April, however, Eng remained cautiously optimistic.
“Zooming in on the shorter term, we see April as a month of ‘two halves’ – a ‘Jekyll-and-Hyde’ of sort – with the first half being positive given the upcoming Invest Malaysia 2011 conference, and the run-up to the Sarawak polls.
“The second half, however, could be more uncertain pending the outcome of the Sarawak election.”
Specifically, Eng viewed that for the opening ceremony, the Prime Minister Datuk Seri Najib Tun Razak would deliver a market moving speech during the conference.
“We can expect either more announcements on the disposal of Khazanah Nasional Bhd’s stake in Pos Malaysia Bhd, the next risk service ontract for marginal oil fields; or the release of government land for property development – or all at once.
“The market may also hold up ahead of the Sarawak State Elections this April 16.”
On the other hand, Eng mentioned that there would be some concerns of greater market volatility for the second half of the month, as the research house was less positive on the outcome of the Sarawak elections.
“With the Barisan National (BN) coalition already holding more than 80 per cent of state’s seats, we believe the risk is that their performance may drop in this upcoming election. If so, there could be some knee jerk selling in the middle of the month with uncertain market performance until the first quarter’s results reporting season kicks in.”
Notwithstanding this, OSK Research advised investors to buy big caps on potential rebounds while focusing on the more defensive small caps, given their superior performance over the past few months.
“The favourite sectors remain banks, O&G, property and construction in the mid- to short-term, while the longer term buys will be media and healthcare.