The local market has risen sharply but may run a little ahead of fundamentals. Macroeconomic fundamentals will have to catch up before the markets can move to a higher level on a sustainable basis.
The FBM KLCI has risen 20.7% in the first-half (1H2009) and has factored in to a large extent improvements in the global economy and rising corporate activities but the easy money has been made and the market may be more challenging in the second half 2009.
Although Malaysia’s valuations were not cheap compared to regional peers, the local market remained attractive as it was less volatile, with stocks which have predictable and sustainable earnings.
Expecting 3Q2009 to be fairly quiet and range-bound pending more evidence of improvement in macroeconomic fundamentals before the next push higher .The next leg of market re-ratings would be earnings-driven set against a backdrop of still-healthy liquidity conditions.
Relative to the region, Malaysia’s valuations were not as compelling as its regional peers due to higher price-to-earnings ratios and lower growth rates with low trading liquidity.
Technically many agree that the stock markets are entering a correction phase. However, the jury is still out on how severe this correction will turn out to be…
It is believed that it is the start of a correction, but whether this will be a major correction that everyone is talking about. Whether this correction will turn out to be a massive moderation of the market – that is a clawback of more than 50% - remains to be seen.
Let’s say that it is a correction to reverse the five months of relentless rise (April – Aug 2009) from 836.21 to 1196.46. It may be gentle at first but let’s see how the world markets also pan out in time to come.
Critics say that this is happening now as growth concerns resurface in light of the recent monetary tightening in China. The good news for investors, however , is that the correction will not be as severe as in previous rallies.
Analysis of the two previous bear rallies – in 1998/1999 and 2001 – indicates that the pullback after troughs tends to be transitory, stretching no longer than two months. And the dips were 15% to 22% off intermittent highs, before rebounding by stronger percentages.
This time around, the correction may be less dramatic because the starting point of the recent upswing was from a depressed trough PPE of 11 times in March 2009, versus 16 times in April 2001. In the immediate term, the market may dip 10% off Aug 2009 high of 1187, forming a base of 1068 in the worst case scenario.
At the end of the day, markets have gone up a lot and risk to reward is not as attractive as before. China aside, movements in the US market must also be taken into consideration. US markets are generally turbulent between Aug and Oct, so some unsteadiness should be expected there. As such 1196.46 may be the peak for the market for now (Aug 2009).
Meanwhile it is worth noting that overseas investors turned net sellers of Malaysian stocks in July 2009 for the first time in four months, as the Southeast Asian nation’s stock market continued to lag behind regional peers.
Foreign funds unloaded US$121 million of Malaysian shares in July 2009, the equivalent of 56 per cent of the previous three months’ inflow. The reversal of fund flows is an “unwelcome surprise for us” and the outflow was “relatively steep”. All its regional peers enjoyed foreign fund inflows in July 2009.”
Foreign funds “lightened” their holdings in stocks such as Genting Malaysia Bhd, Digi.Com Bhd and PLUS Expressways Bhd, he said. Funds added to weightings in banks including Public Bank Bhd, Malayan Banking Bhd and RHB Capital Bhd. Malaysia’s lower liquidity and velocity could be a symptom or cause, of foreign investors’ lack of interest in the market. The net selling could be a temporary hiccup that is consistent with past trends where it was relatively rare for foreign funds to be net buyers for more than three months running.
By RHB … Sept 2009
The FBM KLCI may look vulnerable to a correction in the near term after surging 34% so far this year (2009), but better earnings outlook and a projected return to economic growth next year (2010) will keep the uptrend intact in the longer term.
Although the urge is to turn more risk averse in the near term, investors should position for better returns beyond the next two or three months (Sept 2009 & Beyond).
The firm expects positive economic “datapoints” in the fourth quarter 2009 and upward corporate earnings revision to keep the market’s long-term “uptrend” intact.
It believed any market correction will be quite shallow.
At current levels (Sept 2009), equity measures in Shanghai and Shenzhen had tumbled more than 20% from peaks hit in early August 2009, which fit analysts’ classic definition of a bear market.
By OSK … Sept 2009
Fears of greater anti-speculation controls in China had capped gains in Asian stock markets in recent weeks (Aug 2009) despite Wall Street advances.
Going forward investors pulling are expected to pull out money from the region as valuations are significantly pricier compared with the US.
Despite its view of the FBM KLCI being “expensive”, it raised its call on local stocks to “neutral” from “sell into strength.” The firm also increased its target price for the FBM KLCI to 1,144 points and to 1,265 for 2010.
The brokerage’s year-end fair value was based on 14.5 times earnings for 2010, while next year’s target was derived by putting a higher multiple of 16 times of the same year earnings.
At current levels, the FBM KLCI had risen 34% year to date and 40% from a low point in March 2009. While the leap lagged behind most emerging Asian equity rally in the past months (April 2009-Aug 2009), the valuations appeared to be at a premium compared with its peers.
By HwangDBS … Sept 2009
At 15 times its 2010 earnings and 1.7 times book value, the FBM KLCI was “vulnerable to a correction.” There needs to be further evidence of stronger growth for a sustained upside beyond the current 15 times multiple in the near term.
It has a 2010 year-end (2009) target for the FBM KLCI of 1,240 points and expects local corporate earnings to grow 15% in 2010, after contracting 8.1% this year. It projected a further 11% growth in 2011.
By Tan Teng Boo … Aug 2009
The FBM KLCI is expected to increase between five and 10 per cent from the current level (Aug 2009) by year end (2009).
Tan is also projecting the FBM KLCI to reach 1,500 points within two years (2010 – 2011) depending on the economic development in the country as well as globally. As long as Malaysia does not face major political calamities, the longer-term outlook for Bursa Malaysia remains positive.
On the global economic outlook, Tan believed the global economy led by China has begun a V-shaped recovery and the current (Aug 2009) rally the beginning of a new bull market. The global economy is facing a secular boom with cyclical inflation.
He also believed the global economic contraction in the last three quarters (Oct 2008 – June 2009) was not due to the US sub prime or mortgage problems. Analysis showed that global economic activities contracted only after the collapse of Lehman Brothers on September 15, 2009. In the last twelve months (Aug 2008 – July 2009), the global economy impacted by the US-led financial crisis, went through a very turbulent period, leaving investors totally confused.
By Areca Capital Sdn Bhd … Aug 2009
Fund managers still see value in equities although the local stock market has charged into its fifth month of rally.
Prices for some stocks are a little ‘toppish’ now (Aug 2009) but think there’s room for earnings growth when real economic recovery kicks in and the improvement would help bring valuations down again.
Economists believe faltering global markets may have already bottomed. However, global economies would not see any sustainable recovery until at least next year (2010).
The gradual economic recovery in the US, the biggest import market for most Asian nations, as well as local funds flushed with cash should provide a buffer to a severe correction in the local market.
The fund manager is adopting “cautiously optimistic” stance and will do some stock-picking if the market drops although don’t expect anything major. At this moment (Aug 2009), it invested mainly in blue chips which are liquid.
It maintained that the market would trend upwards “strongly” in two to three years (2010-2011) after the global mess had been sorted out.
By Fortress Capital Asset Management (M) Sdn Bhd … Aug 2009
The FBM KLCI has gone up 41% since mid-March prompting it to re-evaluate his investment strategy. It had trimmed his invested funds from some 90% to about 60% (Early Aug 2009).
They are adopting a cautious short-term stance and have sold ahead of the full release of corporate results. The selldown was to evaluate whether the recent slew of earnings upgrades by brokerages was reasonable or not.
By MIDF Asset Management … Aug 2009
Emerging economies risk experiencing another blow to economic progress given the build-up of stock market bubbles if systemic risks that brought about the economic crisis are not addressed.
Regional markets have been picking up steam since the end of March 2009 on the back of positive economic data and pent-up buying demand. Expectations of greater liquidity in the system from government fiscal stimulus spending have also buoyed market expectations.
It warned that much work was needed to address the systemic risks exposed by the present economic crisis. Liquidity alone does not wash away the problem. Restoring credit lines is essential but to spend at that kind of pace, cutting interest rates to near zero and allowing banks to lend aggressively is scary.
Ironically, the build-up of debt and credit spending that’s happening now (July 2009) was what occurred in the US after the tech bubble popped in 2000. The situation could become as pernicious as in the US today (2009) if risks in the economy were not addressed.
Economic data from the first half of 2009 had shown marked improvement, but there was noindication that this kind of recovery was sustainable. Moreover, countries needed to work to transform their economic model because the export-based model was no longer viable.
All emerging markets are dependent on exports to developed markets, but the demand is no longer there, leaving a void. There is compelling evidence that they will not come back anytime soon. China and India can eventually fill that hole, but that will take time.
This has not stopped market investors from riding on the theme of recovery, however. Market valuations have risen concomitantly with improving economic data, so much so that valuations, at least on Bursa Malaysia Securities, are reaching the high end of the historical trading range.
The increase has prompted some quarters to raise the red flag of a speculative bubble that may be forming on global equity markets.
The benchmark FBM KLCI was trading at 20.49 times price to earnings (PE) on late July 2009, according to Bloomberg data. Bursa’s normalised valuations range from 10 to 20 times PE, with the latter representing peak valuations. The FBM KLCI’s 20.49 times PE ratio was a five-year high, after reaching a low of 9.26 times on Oct 24, 2008. Indonesia’s Jakarta Composite Index valuations also neared a five-year high last Friday at 28.56 times, recovering from a low of 6.77 times on Nov 21, 2008. Singapore’s Straits Times Index, which was revamped in January 2008, also hit its record high last Friday, trading at 16.19 times PE. Hong Kong’s Hang Seng Index, which was valued at 18.55 times PE, neared its five-year high of 20.34 times PE, which was last seen in 2007.
That markets were close to the peaks suggested that investors were expecting corporate earnings to match pre-crisis levels. However, chances were slim that the systemic risks exposed by the crisis had all been completely erased more than a year after the crisis first broke out.
By all accounts, the present rally (March 2009 – July 2009) is being driven by liquidity, but that could not go on forever.
By AMResearch … Aug 2009
Markets were outrunning the economy as equity investors were pricing in a recovery in 2010.
Markets are outrunning the economy, but that’s happening everywhere. The market usualy prices ahead the economy by between six and nine months. The markets are growing to reflect expected potential earnings from next year (2010) even as economies are still contracting.It expects the markets to take corrective measures at some point and based on previous bear market rallies, to correct by between 15% and 22%.
By RAM … Aug 2009
Although a recovery was imminent, it would not be V-shaped — meaning no sudden surge after the trough. Moreover, the global economy was not out of the woods yet.
Developed countries that contribute more than 60% of global output are still in recession, but it is important to note that the recovery process has begun. There are signs that we are on an uptrend, but it is also a slippery slope due to massive wealth destruction. As long as credit flows are subdued, there might be a relapse in the US and European economies, which could trickle down to us.
Though no bubble had developed in key markets, it did not mean that one would not form. In Malaysia, we have not exhibited the classic symptoms of a bubble such as supply outstripping demand, a steep decline in prices and an excess of 20% increase in credit growth over a lengthy period of time.
But often with bubbles, you don’t know you are in one until it pops, and this is an innate failure of the capital markets.
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