Market Commentaries & Technical Analysis as at 7 Sept 2009

Market Commentaries

The biggest corporate news last Friday (04.09.2009) was speculation that the Chinese government has been offered a 10% stake in Sime Darby Bhd. This was quickly dismissed by Malaysia’s officials but the market is not expected to believe the denial.

The possible entry of Chinese companies into Sime Darby is expected to dictate the pace of the market this week as the plantation giant carries significant weightage on the FBM KLCI, being one the top 10 stocks.

This week, Malaysia will release the trade figures for July and Reveal its foreign reserves position. But with the corporate reporting season over and GDP figures for most countries announced, no other major announcement is expected to impact the market this week.

The US Federal Reserve’s Beige Book, which is publishes eight times a year and gathers anecdotal information on the current economic conditions in US, is one of the more important economic data due out this week.

Betting For A Second Leg Recovery (Sept 2009 Onwards) …

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.

2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.

If there is any rate action, it will be in baby steps and probably in the second half of 2010. Did not foresee a resurgence in high inflation now (Aug 2009).

High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”

There was a need to reinvent Asia and make a shift from external demand to domestic demand.

Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.

The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.

Investors are also encouraged to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery

Corporate Earnings Of Malaysia … Going Forward

In the midst of a global market correction, intensifying AH1N1 flu virus and political uncertainties, there was some splash of good news on the Malaysian front. The second-quarter 2009 earnings season, which only just got wrapped up (Sept 2009), pointed to one direction – corporate Malaysia may be back on positive earnings territory.

For those who reckoned the second quarter 2009 would echo the weak first-quarter report card 2009, they welcomed the upside surprise.

One indicator for a positive outlook for equities would be the upgrade to downgrade ratio, which turned positive to above 1 time for the first time since the fourth quarter of 2007.

It rose from 0.6 time in May 2009 to a hefty 1.6 times, the best since the fourth quarter of 2006. This implies that far more companies beat expectations than the reverse. Upgrades also exceeded downgrades for the first time since the second quarter of 2007. The last time this happened in the fourth quarter of 2006, the bull market lasted for a year.

With green shoots sprouting out during the May and August 2009 results seasons and the second-quarter 2009 gross domestic product pull-back coming in lower than expected, the logical conclusion to draw is that the worst may be behind.

The return to positive territory is earlier than expected. It is expected to happen in the third quarter 2009. The positive earnings momentum is good news for the stock market, as the last time earnings turned positive after being in the red was in the second quarter of 2006. The stock market had then rallied from the fourth quarter of 2006 onwards.

The second-quarter 2009 results were overwhelmingly stronger than expected. Not only did the pace of earnings contraction slowed down but the 12-month forward core market earnings saw further upgrades in July to August 2009, with banks driving the overall upgrade in market earnings.

Given the positive trajectory, most are already looking forward to 2010 earnings and as such, the third-quarter 2009 results may somewhat come off as a non-event unless, of course, there are significant surprises. In fact, some expects to see more downgrades in the third quarter 2009 as realisation of a longer drawn-out recovery sets in.

Earnings recoveries and growth expectations are positive to stock prices, especially when earnings momentum is strong. With the FBM KLCI having rallied 40% from the March 2009 trough, a sustained re-rating will not only require earnings delivery but further consensus EPS upgrades is also equally critical.

It is thus important to closely monitor the earnings revision trend in September to October 2009 leading up to the third-quarter earnings season.

Technical Analysis

The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index retraced from the top to the mid-range before reversing up to trigger a short-term buy on 04 Sept 2009.

The past week witnessed the 14-day relative strength index pulling back from a reading of 58 to the mid-range before ticking up gradually.

Meanwhile, the daily moving average convergence/divergence (MACD) histogram remained in sell mode, but the downward pressure appeared decelerating.

Weekly indicators were very much unchanged, with the weekly slow-stochastic momentum index sustaining the declines and the weekly MACD in danger of flashing a sell signal.

Bursa Malaysia continued to consolidate the past week, but with a mild upward bias on late support in the heavyweights. It looks like the market is just taking its time digesting and adjusting the recent rally. Though indicators so far, were not consistent, there is no mistake to say the worst of the global economy is over, if not already on the healing course.

According to the daily chart, the prevailing trend remains intact, but little has changed while the principal index continuing to flirt within a band.

The market has a chance to construct a new floor at above the 1150 point level, having seen the market trend sideways at above this level. There is still a possibility of the FBM KLCI falling towards the 50 day MAV lines (1138). However its uptrend will remain intact as long as the market stays above the 200 week MAV line (1106).

This means that even if the 50 day MAV line were violated, the uptrend extending all the way from the March 2009 low will still be intact. Bullish bias view still remains.

Support floor is maintained at the 1,150 points, followed by the 1,140-1,142 points band.

Going forward, should there be any early concrete signs of the existing sideways congestion coming to an end or the bulls about to resume their rally, it would certainly be the trading volumes.

Apparently, daily turnover shrank to 499 million shares before getting better to over 600 million shares. If buying can further improve from here onwards, there is a great possibility of a pre-Raya run ahead. So, watch out the volumes.

Technically, Bursa Malaysia may still be trapped, unless there is a new catalyst emerges. Support is maintained at 1,150 points, followed by the 1,140-1,142 points band while resistance can be expected at 1,196.46 points, and the next, at the 1,200 points psychological mark.