What next for the market?

The Star Online > Business
Saturday July 2, 2011

What next for the market?

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

IT'S one thing to worry about all the noise over the economic developments that envelop global markets and quite another to predict how investors will react to them. But there is one overriding common theme caution.

There are many reasons for such apprehension. The year started with the Arab revolution, which led to the political upheaval in many countries in the Middle East and North Africa. Then there were the earthquake and tsunami in Japan that wreaked havoc on the northeastern coast of the country and had repercussions elsewhere given the deep linkages Japanese industries have in the global supply chain.

If they were not enough to ignite worry among investors, the ongoing debt problems in Europe seems to be frothing over as Greece was on the verge of a massive default that would have caused a severe contagion in lenders from Germany and France, two of the EU's largest economies.

In addition, the economic malaise in US persists. At best, the economic indicators are still patchy to suggest that the United States has truly broken away from the gravity of its financial crisis. To infuse more momentum into the US economy, given fears of deflation, the US Federal Reserve embarked on a second round of printing money, called Quantitative Easing 2 (QE2) to the tune of US$600bil. While the move has injected money into the system and helped lift Wall Street, it really has done little for Main Street.

As a consequence of liquidity and growth rates rebounding in emerging markets, commodity prices have surged, lifting inflation and causing another headache for central bankers, governments and consumers world over given the rising cost of living.

The pain is not spread out evenly across all markets.

The FTSE Bursa Malaysia KLCI this week hit a new record high at 1,582.94 on Friday, the third consecutive day it breach record levels. Maybe it reflected the relief over the austerity measures in Greece's bailout plan which were passed amidst tough internal resistance. This lends credence to the long-held belief that when things get tough globally, foreign investors began to appreciate Malaysia's defensive qualities.

With the close of the first half of 2011, pundits are now poring over how the markets will fare in the second half. Given the volatility of markets and the unpredictability of ensuing events, most of them are likely to adopt cautious projections.

Global Fund Manager Survey

One guide to what people who manage money are thinking about is the Bank of America Merrill Lynch fund manager global survey. The latest published survey, which was conducted from June 3-9 on 282 people who managed US$828bil of assets under management, is pointing to money managers favouring less risk.

The survey's risk and liquidity indicator fell to 38, which is below the long-run average of 40 for the first time in nine months.

“The indicator had been relatively resilient so far despite growth concerns,” says the report.

“Equities and commodities weights have been cut with gains for cash and bonds with most of the asset classes very close to their long-run averages.”

The survey discovered that growth and profit expectations stabilised after recent sharp falls as inflation expectations fell dramatically in June from a couple of months ago.

The fund managers felt the global macroeconomic backdrop was not weak enough to warrant more stimulus as three quarters of its panellists thought a recession was unlikely and only 13% expect a new round of QE in the second half.

Despite concerns permeating investment decisions, emerging markets remain the favoured destination among those surveyed.

Although the numbers have slipped from May where 29% of fund managers polled were overweight on emerging markets, the survey revealed that 23% were positive of the prospects of emerging markets in June.

“The cut in emerging market positions comes amid a broad-based rotation towards defensive assets: Global equity allocations are reduced and the average cash level has risen from 3.9% to 4.2%,” says the report.

Investors were favouring markets with domestic demand drivers and as global economic growth is forecast to drop a tad, investors trimmed their positions in cyclical stocks.

Among the most favoured emerging markets are Russia, Indonesia and China.

One painful finding of the survey is this among the emerging markets, Malaysia was the least favoured. But not all equity research houses may concur with that. Goldman Sachs, for one, has an overweight call on Malaysia and given the relative size of the Malaysian market, a handful of such calls would be enough to provide an oomph.

Defying that painful notion further is the fact that Bursa Malaysia hit an all-time high this week. Furthermore, the trading patterns in April and May show that foreign institutional investors were net buyers of Malaysian equities, quite the reverse from their net selling position earlier in February and March. As for domestic institutional investors, the trend was the opposite they were net sellers in April and May but net buyers over the previous two months.

Trading value which stood at RM52bil in January this year is trending downwards towards May which was the lowest for the year at RM31.2bil. Trading volume has also been falling on a monthly basis since January from 39.5 billion units to 18.4 billion units in May.

Largely, local retailers were net sellers for most of the year, only buying more shares than they sold in February.

Crystal ball gazing

What's next for Bursa Malaysia? Given that the exchange is at record levels, pessimism and optimism seem to be locked in a tug-of-war.

MIDF Amanah Investment Bank Bhd senior vice-president and head of research Zulkifli Hamzah says the first half performance was surprisingly resilient which largely bucked the regional trend.

“On closer observation, we would attribute the resilience of the market to foreign buying,” he tells StarBizWeek.

“Foreign investors were net buyers on Bursa Malaysia in 10 of the 13 weeks between March 21 and June 19. We will not be surprised if foreign shareholding on Bursa Malaysia is higher than 22% now, as an estimated RM4.6bil of foreign money had been ploughed into local equity during that period.”

Zulkifli opines that the foreign money flowing into Malaysia involves genuine portfolio funds instead of speculative money seeking quick returns.

“The upgrade of Malaysia's country status from Emerging to Advanced Emerging market by FTSE effective June partly explain the inflow of foreign money, but more importantly, we believe Malaysia is back on the radar screen of many global funds. This augurs well for the market in the second half,” he says.

TA Securities head of research Kaladher Govindan says many of the worries investors had in the first half appear to be winding down and sentiment wise, the second half should be better.

He feels the concerted effort by the EU to tackle the debt crisis in Europe and Japan picking itself out of a recession should help improve market sentiment and anticipates the second half of the year to be a recovery period after a long consolidation period.

“Slower than expected growth in the United States and lingering sovereign debt issues in the US and Europe respectively are expected to drive back funds flow into emerging markets, which will benefit FBM KLCI,” he says.

Zulkifli is maintaining his year end FBM KLCI target of 1,650 points but expects more volatility in the second half.

“The second half is generally wrought with downside surprises, and is also associated with major market corrections. We do not expect the perception to be any different this year,” he says.

Earnings season will be the focus in August and he feels the numbers for the second quarter is expected to remain bad for airlines, shipping, resource-based industries such as gloves, steel and semiconductor.

“If there are any silver linings at all, we expect Malaysia and other resource-rich countries in this region such as Indonesia and Thailand to benefit from the switch out of China and the Asian tigers,” he says.

“China is engineering a slowdown at a scale not seen by an economic super-power. The statutory reserve ratio for its banks is now at a disconcerting 21.5%. More banks will feel the squeeze.”

Citigroup in its note on Malaysia says the upcoming earnings season in August will likely not excite the market.

“The conclusion of the latest results season confirms our view that overall business sentiment appears to have turned cautious as inflationary threat looms with economic activities on low gear,” it says.

Citigroup feels inflation pressure for food and building materials, together with monetary tightening and higher inflation expectations from the electricity price hike could be negative in disposable income and business profitability. It is positive on chemical and consumer stocks and recommends investors take defensive positions in utilities and gaming.

Sectors to watch out for going forward are the oil and gas, plantation and banking, which recorded higher year-on-year earnings growth during the recent quarterly reporting season.

“We expect their positive earnings momentum to continue into the second half of this year,” he says.

His choice of oil and gas stocks is due to higher oil prices which will not only benefit oil majors but also fabricators as well as support service providers as it encourages further upstream and downstream activities.


“Despite the recent sell down, we expect CPO price to remain firm as the global demand for vegetable oils is rather inelastic,” he says.

He thinks earnings growth for banks will be underpinned by healthy loan growth, enhanced fee-based income, lesser provision with improved asset qualities and the rising overnight policy rate (OPR) which cushioned the pressure on margin.

Apart from these sectors, Kaladher is also overweight on construction.

“Players in the domestic-oriented sectors will do well on the back a stronger ringgit and weaker dollar,” he says.

Inflationary environment bodes well for property sector as well as investors switch from holding cash to real estates.”

Exporters that rely heavily on dollar based sales like those in the electrical and electronics segment will be hit and Kaladher says it will be a double whammy for manufacturers, for instance glove producers, who do not have a natural hedge due to high local cost content.

Economic Transformation Programme

Analysts have said the economy will also be a key determinant on how stocks will react in the second half of the year.

ECM Libra Investment Bank Bhd research head Bernard Ching says that with stock valuations for Malaysian equities more expensive than regional peers, analysts will be keeping an eye out on how the economy performs not only for the next six months.

“We are really looking at 2012,” he says.

Economists have in recent weeks downgraded growth projections for Malaysia for 2011 as some have cut their estimates to the lower end of the Government's growth projection of 5% to 6%.

Merrill Lynch (Singapore) Pte Ltd economist Chua Hak Bin feels with the second quarter probably growing by between 4% and 4.5% as global growth slows, the external environment and the sluggish performance of Malaysia's exports would make things tough for the country.

“Achieving 5% is a stretch given the global soft patch. Exports are not going to help,” he says.

One area that might, and the Government and analysts are looking at, compensate for the slower external growth is the economic transformation programme (ETP).

Credit Suisse analyst Stephen Hagger feels the ETP will succeed where others have failed due to its structure, which is private sector driven.

“We believe Malaysia is entering a super cycle' of investment and growth that could result in 6% to 7% per annum. GDP growth for three years, due to the ETP, investment from Singapore, looming general election and cash flow from commodities notably palm oil and rubber,” he says in a note.

Kaladher says the ETP and other transformational programmes undertaken by the Government would offer protection for the stock market in the second half.

“In a way the market has shown resilience in the last six months when most regional indices tumbled towards their March low,” he says.

“The Government's ETP commitment provides some sort of visibility for domestic projects that are expected to cushion the external slowdown.”

In a report on June 13, Credit Suisse says 50% of the ETP projects have taken off. The cumulative ETP-related investments total RM170.3bil.

Zulkifli too agrees on the influence of the ETP and the Government Transformation Programme (GTP), saying those programmes were already in the process of taking the country to the next level.

“Despite all the challenges, the government has managed to institute pro-active programmes to move the country forward, and it is now a matter of execution,” he says.

Apart from the ETP acting as a buffer for sentiment, there are other factors that can act as stabilisers for the stock market in the second half.

“The weightage of banking stocks on the KLCI alone is about 34%, and Malaysian banks are among the best capitalised in the region. Add that by another 16% weightage on plantation stocks and 7% on power stocks, one will get a better appreciation of the defensive nature of the FBM KLCI,” says Zulkifli.

“But from a global perspective, the strongest protection accorded to the FBM KLCI is probably the strength of the ringgit, which we expect to hit RM2.95 to US$1 sometime in the second half. The fundamentals of the ringgit are stronger than that for the US dollar, and that is important for the dollar carry trade.”


Source/转贴/Extract/Excerpts: The Star Online
Publish date:02/07/11