n The Coming Week1. 2010 Budget Announcement In Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009
Market Commentaries
A hush market in the third quarter of 2009 is reflected by a slowdown in the Muslim fasting season and a typically weak September 2009 in the equity markets. The pleasant 2Q09 results season is already priced in by a rushed recovery since March 2009.
Expecting a seasonal economic slowdown and less newsflow on mega project tenders and awards during the Muslim fasting season that started on Aug 22 2009.
Meanwhile, improving economic fundamentals have been discounted by institutional investors who have already rushed in to raise their equity weightings since March 2009.
Nevertheless, downside is limited given the ample domestic liquidity, led by the newly established government-backed Amanah Saham 1Malaysia Fund, which raised more than RM2 billion in August 2009. 1Malaysia’s fund manager Permodalan Nasional Berhad says that with its recent fund-raising efforts, it has raised about RM15 billion year-to-date (Sept 2009).
The key event in 3Q09 — the Budget proposal announcement in October 2009 – is unlikely to provide much excitement. However, key events in 4Q09 should include mega project calls for tenders and awards (LCCT, LRT extension), which will benefit the construction and building material sectors, and refinement to the National Automotive Policy, which should reinforce support for national car producers like Proton.
The dramatic recovery to stability since March 2009 is underpinned by the following: a) easing losses and fund-raising needs by banks globally, b) sharply narrowed US credit spread, c) significantly lower risk premium in emerging markets as reflected in the JP Morgan Emerging Markets Bond Index, and d) steadfast recovery in US housing transactions and median pricing.
Improving domestic indicators are reflected in the following: a) rebounding employment and consumer sentiment indices; b) modest improvement in fast-moving consumer goods consumption, and c) improved sales of durable goods (including auto sales), particularly for newly launched mid-tier to high-end residential properties.
Expecting modestly improved q-o-q earnings in 3Q09, in line with global trend.
However, not completely out of the woods. We continue to subscribe to the view that global economies will sustain a much more modest economic growth compared with the period prior to the emergence of US subprime loan problems.
In particular, expecting US consumerism to remain weak — although there could be a temporary recovery in the Christmas season — as high unemployment rates and job uncertainty continue to encourage high savings rates.
Market consolidation underway (Sept 2009) due to market’s low value proposition. KLCI is already trading well within its historical forward PE band of 12-17x. The KLCI trades at 14.8x 2010 earnings, in the middle of its post-Asian financial crisis PE range. It also trades (Sept 2009) at a current P/B of 2.0x vs the historical nine-year average of 1.7x (based on Bloomberg).
Expensive relative to region; non-strategic foreign ownership to stay at 22%. Despite improved macroeconomic and political conditions, market valuations (Sept 200() are not cheap enough to entice foreign investors to rush in, although there are still some compelling values among mid-caps.
FBM KLCI Crossing The Psychologically Important 1,200-point Level …
The local stock market’s benchmark index breached the psychologically important 1,200-point level (Sept 11, 2009) driven largely by the global liquidity run.
Investor sentiment in the region has been bolstered by a number of factors including the weekend decision by G20 finance ministers to keep economic stimulus efforts in place as well as a slower decline in US job losses.
Nevertheless, cautious remains on the local stock market. While it seems to be a bull run, the fundamentals that drive a bull market appear absent. The index is currently (Sept 2009) where it was at the beginning of 2007, the year of the bull run, but the current (Sept 2009) backdrop for the fundamentals that would support current valuations remains very “touchy”.
In 2007, we had a great commodity market, fantastic exports and robust earnings – where are all of that now (Sept 2009)?
Liquidity, however, may be sufficient to keep the market on an uptrend for a while but it would be difficult to peg the market’s fair value because of this. The G20 countries said they would continue to flood the system with liquidity so the economy doesn’t tank, that’s what investors wanted to hear.
Technically, most of the short-term indicators are painting a positive landscape, with the weekly moving average convergence/divergence (MACD) histogram resuming the upward expansion against the weekly trigger line and the daily MACD triggering a “buy” signal.
The FBM KLCI’s successful penetration of the 1,200-point monster resistance, supported by bigger trading volume indicates the end of the recent sideways congestion phase and the start of a pre-Raya rally.
Betting On 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 daily slow-stochastic momentum index triggered a short-term sell at the top on Thursday, but it can’t be confirmed as yet.
In contrast, the daily moving-average convergence/divergence (MACD) histogram expanded positively and steadily against the daily signal line to stay bullish. It issued a buy on Tuesday.
Meanwhile, the 14-day relative strength index continued to linger in the bullish area. Weekly measurements were looking great, with the slow-stochastic momentum index flashing a buy and the MACD indicator resuming its upward expansion against the weekly trigger line.
After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.
A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.
The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.
Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.
Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.
Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.
The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.
No comments:
Post a Comment