Tuesday, July 5

M’sia’s market fundamentals remain robust in 2H2011


KUCHING: The ongoing implementation of the Economic Transformation Programme (ETP), potential corporate exercises and expectations for an early general election have set the mood for the equities market to thrive in the second half of 2011 (2H11).

GAINING MOMENTUM: The ETP implementation, potential corporate exercises and expectations for an early general election, will drive the KLCI to hit the target of 1,710 by year end, says Maybank IB.

For the record, Prime Minister Datuk Seri Najib Tun Razak sent a strong message with regards to the government’s determination for a high income economy by 2020 in his address to fund managers and investors at Invest Malaysia (IM) New York last week.

Some of the key propositions for investing in Malaysia included the country’s economic strength in its cultural diversity, an enterprising spirit that drove business and commerce, a liberalised services sector, and a government that served businesses and not the other way around.

“Prime Minister Najib took stock of Malaysia’s successes in the Government Transformation Programme (GTP) and the ETP which has attracted US$35 billion investment within just six months of its launch in October 2010,” said Maybank Investment Bank Bhd (Maybank IB) chief economist Suhaimi Ilias.

He pointed out that Malaysia also offered access to a huge Asean (Association of Southeast Asian Nations) market which had a US$2 trillion gross domestic product (GDP) worth this year, being the world’s ninth largest economy.

“Our equity research team also went on a Malaysian equities and economy marketing trip, to met with fund managers in New York and San Francisco,” said Ilias. “The feedback was generally positive with the ETP being seen as the key driver to Malaysia’s long-term growth prospects.”

Seasoned US fund managers, however, saw a ‘disconnect’ between Malaysia’s positive economic outlook versus the equity market. Malaysian equities were still viewed as not being sufficiently liquid, since substantial holdings were still held by the government linked investment funds (GLIF), Ilias added.

On macroeconomics, the US fund managers were generally receptive of Maybank IB’s forecasts and views on growth, inflation, interest rates and exchange rates.

To recap, the research firm was looking at real GDP growth of 5.5 per cent this year and 5.7 next year, an inflation rate of three per cent  and 2.9 per cent in 2011 and 2012 respectively, another two 25 basis points increases in the overnight policy rate (OPR) in July and September 2011, with the ringgit to stay firm versus US dollar.

On the Malaysian equities front, US fund managers were focusing in the oil and gas (O&G) as well as construction sectors which would be the first tier of beneficiaries from the ETP. Stocks that received strong interest were O&G fabricators such as Kencana, SapuraCrest, Dialog and MMHE, and major contractors like Gamuda and IJM.

“Banks like Maybank and CIMB which have expanded beyond Malaysian shores also attracted interests for their regional proposition,” explained Ilias.

Ilias further pointed out that the US fund managers were also agreeable to its thesis that economic growth would be underpinned by domestic business spending upcycle following the rollout of investments and infrastructure projects under the ETP, although execution risk remained a key concern.

Risks to growth included the fluid external environment, although consumer spending is now under the spotlight following issues of household debt and inflationary pressures.

“The notable ‘challenge’ to our macroeconomic forecasts is on the benchmark OPR – why stop at 3.5 per cent for end of 2011 and not higher?,” said Ilias. “Our response is that Bank Negara would be wary of ‘over-tightening’ monetary conditions of the ringgit versus US dollar. Year-to-date, we have seen another 25bps rise in the OPR and the ringgit has gained as much as 3.5 per cent against the US dollar.”

On the other hand, there was also some interest in politics, particularly with regards to the timing of the 13th general election (GE), where the feeling was that Najib would call it earlier than the March 2013 deadline.

This was deemed ‘positive’ for the equities market as it indicated the government’s confidence of staying in power and even recouping some of the losses in the March 2008 12th GE, said Ilias.

“Our core sector favourites remain in construction, building materials, properties and O&G on order book driven news flow. Real estate investment trusts (REITs) offer attractive yields of 7.3 per cent on average, while Malaysian banks offer a regional perspective as well as merger and acquisition potentials,” he concluded.

Based on the given factors, Maybank IB maintained its 1,710 points year end Kuala Lumpur Composite Index (KLCI), which implied a 15 times one-year forward price earnings ratio target.