Market Outlook as at 23 Sept 2009 ...

Investment Theme For 2009
*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Iskander Development Region (IDR) In South Johor
6. Eastern Corridor Development Programme (Petronas-Led)
7. Northern Corridor Economic Region
8. Sarawak Region Corridor
9. The Sabah Development Corridor
10. Sarawak Corridor of Renewable Energy (Score)
11. RM40 Billion Public Transport Expenditure
12. The Asia Petroleum Hub In Johor
13. The Solid Waste Management Play
14. Flow of OPEC Petrodollars
15. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***

16. Water & Water-Related Play
17. A U-, V-, W- Or L-Shaped Global Economic Recovery
18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings
19. The Economic Stabilization Plan & Mini Budget
20. Interest Rate Cycle (Speculating End Of Easing Cycle As Economy Recover)
21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)
22. Liberalization Of The Services/Financial Sector
23. The Malaysian Government’s Reform “Train”
24. GLCs Revamp
25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)
26. A ‘Third Stimulus’ Package (Uncertain)
27. Market Liberalization (Paring Down In GLCs’s Stake)

Watch List In The Coming Week
1. 2010 Budget Announcement In Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension)

Technical Analysis
In conjunction with the Hari Raya Aidilfitri public holidays, the Malaysian stock market will be closed for two days. Operations will resume on 23 Sept 2009.

Given the three-day holiday-shortened week, trading of Bursa Malaysia shares is expected to be thin, and range-bound. But there is also a high possibility of buying momentum staging a strong comeback after the long market break, given the prevailing bullish market sentiment. It is believed that investors would not want to miss out on this rally.

The support line for FBM KLCI is pegged at around 1,200 to 1,210 points, with immediate resistance at 1,220 - 1,240 points. The breakout level is marked at around 1,190 to 1,195 points.

The FBM KLCI may hit its saturation zone at 1,237.25 to 1,248.34 soon, before risks to the downside increase greatly. Investors are urged to remain cautious at the present (Sept 2009) “lofty” levels that the local stock market have attained.

The ample share placements and off-market deals that have been happening in the background, arguing that these are obvious pre-cursor to an impending market correction.

With market breadth and volumes shrinking, coupled with the emerging weak and bearish technical signals, it is just a matter of time before the benchmark index heads south. Thus, he advises investors to trade with a short-term time frame.
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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.

Undermining Factors
1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);
2. Malaysia Political Uncertainty;
3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);
4. Volatile Foreign Exchange Market (Signs Of Volatility Has Peaked);
5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);
6. Commodities Prices (Strengthening);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises
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1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu (Worsening)
4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Leg Global Recovery (Sept 2009 Onwards) !!!

Recession – Recovery – Growth – Boom - Burst
(Transition From One With China As Sole Driver To A More Balanced US/China Model)

a. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
b. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
c. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
d. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
e. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY
f. What’s NEXT For The US & China Equities Market
g. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
h. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
i. What’s NEXT (2H2009) For The Malaysian Equities Market …
j. Carry Trades Are Making A Come Back Into Emerging Markets
k. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

a. The Good, The Bad And The Ugly Aspects Arising Since Sept 2008 …

The demise of the venerable Lehman Brothers September 2009 marked a defining moment for the world’s financial and economic systems. But the crisis did not last as long as expected, there are understandably structural changes going on in many countries as they adapt to the new economic realities.

The Good

i. Improving Outlook ...

The global economy is responding well to the massive injection of government spending worldwide.

It is generally perceived that the downturn has bottomed out about six months ago (March 2009). There are now (Sept 2009) some clear signs that recovery is on the way for most countries, though the process remains gradual and vulnerable, and some economists are arguing about the sustainability of those comforting indicators.

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn (Sept 2009) said a recovery of the world economy could occur earlier than expected, at the beginning of next year (2010).

The global financial institution has recently revised upwards its forecasts for the global economy. It now (Sept 2009) expects the world economy to shrink 1.3% this year (2009), a tad better than its earlier projection of 1.4% contraction, before growing again at 2.9% next year (2010), compared with its 2.5% growth projection earlier.

ii. Asia Leading ...

Asia seems to be leading the global recovery process. Most economies in this region started turning around in the second quarter of the year (2009). Malaysia’s gross domestic product (GDP) is expected to post growth by the fourth quarter of 2009.

The quick rebound of Asia seems to support the long-prophesied rise of the region as the next economic power. Economists are arguing that the crisis has accelerated the tectonic shift in world economic power to the emerging markets of Asia, in particular, China.

Asian economies suffered a downturn arising from the financial crisis due to the collapse in exports demand from industrialised economies that were going through a deep recession.

Exports demand for Asian goods is still sluggish till this day, but the Asian economies are improving faster than expected, thanks to the expansionary packages that are stimulating domestic demand.

iii. New Platform ...

Asia is coming to grips with the fact that external demand will most likely remain in the doldrums for a long time, as consumers in industrialised economies become more frugal. Hence, the export-dependent region has been displaying a sincere desire to shift to a new economic model – one that is more inward-looking.

Efforts are now (Sept 2009) moving towards boosting domestic consumption for sustainable growth. This may take some time as such efforts would involve ideology changes – that is, from the present (Sept 2009) “save more, spend less” to “save less, spend more”.

The Bad

i. Inflation Threat ...

The economy bouncing back from the trough has brought with it a quick, perhaps too soon, rebound in the global crude oil prices, which are currently (Sept 2009) hovering around the US$70 per barrel level, compared with less than US$40 per barrel at the end of last year (2008).

This gives rise to the risk of inflation, which could jeopardise the nascent recovery process. Nevertheless, the inflation risk at this stage remains subdued, as most countries are still in a deflationary stage.

Technically, Malaysia too seems to be experiencing a deflation as indicated by its consumer price index (CPI). The negative CPI for the third consecutive month in August 2009 gives the impression that the general price level of goods in the country has fallen, but as we are well aware, this is not the case.

The negative CPI is more reflective of the decline in fuel prices over the past one year (2008). But in general, the prices of most goods remain sticky since they were raised in tandem with the steep rise of fuel prices in July 2008r.

To be cautious, the current (Sept 2009) environment of low interest rates provide room for inflation to seep in. So, central banks could raise interest rates earlier than expected to rein in the risk of inflation.

ii. Bubbles Forming?

The expansionary monetary policies are feeding cheaper funds into the economy. While liquidity remains comparatively tight in most industrialised economies, emerging markets in Asia are flushed with liquidity.

Financial experts are now (Sept 2009) warning of potential asset bubbles, especially in property, forming in Asia. Liquidity in the region is far too abundant for policymakers to keep interest rates at their current (Sept 2009) lows.

Low growth and the lingering uncertainties are setting the conditions for bubbles to emerge as officials maintain their accommodative monetary stance. In an economy flushed with liquidity, prices of assets can increase even if growth fundamentals appear unsupportive.

There are already signs that the leverage in Asia is building up, while that of the West is falling. Since the collapse of Lehman Brothers, the Asian leverage has risen from 15x to 17x for the second quarter of this year (2009). The Western leverage, on the other hand, has decreased from 34x to 28x in the same period.

Asia’s leverage is coming off all-time lows and will probably go higher. This is especially so for Hong Kong, China, India and Indonesia.

iii. Joblessness ...

Meanwhile, the labour market conditions in the global economy have not improved much. Unemployment rates in most countries remain high, and they are rising.
This problem does not only plague the industrialised nations, but also some Asian economies, including China.

The unemployment rate in Malaysia was at a manageable 4% for the first quarter of 2009. The rate is expected to increase to 4.5% for the full year, compared with 3.3% in 2008.

The unemployment situation in Malaysia is mainly affecting the manufacturing sector, which is currently awash with excess capacity due to weak external demand.

iv. Declining Investments ...

Excess capacities across industries in most economies have caused the decline in private investments across the board.

In Malaysia, the sharp decline in private investments activities is due mainly to excess capacity in the manufacturing sector. Industry observers say that there could be a prolonged recovery for private investments in Malaysia due to the prevailing excess capacity.

vi. Widening Deficits ...

While the massive injection of government spending worldwide have managed to pick up the slack in most economies, higher government spending amid declining revenues have pushed some of them to face historically high levels of fiscal deficits.
This is particularly so for the US, whose fiscal deficit is expected to rise above US$2 trillion by the end of the year (2009).

Malaysia has been in a fiscal deficit position since the Asian financial crisis in 1998. The present (Sept 2009) pump-priming activities is expected to widen its fiscal deficit to 7.6% of the country’s GDP this year (2009), compared with 4.8% in 2008 and 3.2% in 2007.

Some countries like Singapore are luckier as they are merely depleting the surpluses that they have accumulated through the boom years to finance their expenditure.
vii. Protectionist Measures ...

On the global trade front, many countries seem to be putting up barriers to protect their own turf. This is despite policymakers preaching the opposite – that protectionism will only hurt global recovery. A case in point is the recent spat between China and the United States.

The Ugly

Greed Is Back …

With the improving economic outlook, the appetite for risk has also returned as investors seek to make more easy money.

Stock markets in major economies are rising. It is widely feared that their valuations are getting stretched to levels unjustified by earnings growth. It has also been reported that Western financial institutions are once again betting on high-risk instruments for better margins.

Unfortunately, as long as there is money to be made, greed is pretty much a virtue. Yet, this is the very sin that has brought the global economy into this mess. Generally the fear of missing out on the global rally far outweighs the risk of a potential sharp correction ahead.

b. Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity

The Government is putting its money where its mouth is. Recent developments seem to suggest that it is finally ready to reduce its shareholding in the government-linked companies (GLCs), something that has been talked about for a long time.

A strong indication surfaced on Sept 10 2009, when Khazanah Nasional Bhd placed out a 5% stake, or 55 million shares, in Malaysia Airports Holdings Bhd.

At the same time, two other Khazanah-related companies, namely CIMB Group Holdings Bhd (in which Khazanah owns 28.4%), and Pos Malaysia Bhd (32.2%), reported large off-market share placements.

On Sept 10 2009 as well, 30 million CIMB shares, or a 0.8% stake, changed hands at RM10.38 per share. It was reported that the seller is Takrif Aspirasi Sdn Bhd. CIMB’s eight largest shareholder. The following day, Utilico Emerging Markets Ltd sold 25 million Pos Malaysia shares, or a 4.7% stake.

While these two off-market transactions are unrelated to Khazanah, they support the argument that now (Sept 2009) may be a good time for the government investment arm to sell shares in the GLCs.

Rumours began swirling as to which investee company of Khazanah will be next to see a similar share sale.

That aside, market watchers believe that Prime Minister Datuk Seri Najib Razak, who is also Finance Minister, is serious about wanting the Government to lower its corporate holdings and attract new investors.

He is thoughtful in allowing the private sector to discover its own path and for the local bourse to eventually flow with liquidity.

Government’s desire to pare down its stake in GLCs will get more participation, and in an overall sense, there’s greater market liberalisation. This also profiles Malaysia as an institutional haven for global investors.

The stock market needs more shareholder diversity, and this means fewer shares in the hands of the usual local institutional funds.

Long-term shareholders such as sovereign wealth funds that have a strategic interest will be value adding for the GLCs in many different aspects. A sovereign fund won’t sell for the sake of trading gains. In fact, they may increase their stake over time, as they always need to be invested.

It is true that for a country to have long-term stability, it still needs its own capital base and local investors. However, foreign investors create competition, which is needed to put everyone on the treadmill. Otherwise, there is a tendency to lie down or stand still.

With foreign participation, Malaysia will have the benefit of exposure to foreign views and perspectives. This is because, apart from the capital infusion, what is just as important is the value brought by the new investors.

A foreign investors can contribute by enhancing many different aspects such as market access, higher technology and new management. This leads to higher productivity and competitiveness. These are key ingredients to fast track our economy to global heights.

The private sector has to play its part in reinvigorating the economy and creating some crowding-in effect.

While people may be concerned about foreign control, this should not be an issue, especially when the positive effects on the industries and companies become tangible.

For instance, should Volkswagen AG (which is a world leader in its segment), takes up a stake in national car maker Proton Holdings Bhd, it immediately creates greater global value. Upon signing on the dotted line with its new partner, Proton becomes a global player instantly!

While hot money is sometimes viewed negatively, it has its benefits. First of all, it increases optimism and confidence levels. Hot money is inevitable in any market, although, yes, too much of it isn’t good. But in Malaysia’s case, we are at the stage where we need more foreign direct investments (FDI).
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Khazanah Nasional Bhd is expected to reduce stakes in more government-linked companies (GLCs) after selling off 55 million shares, or 5%, in Malaysia Airports Holdings Bhd (MAHB) to unidentified institutional investors.

The government-linked investment arm might be looking to divest stakes in companies that it owned more than 60%. The selldown in MAHB’s was “unique” as Khazanah used to own more than 70% in the company.

The next possibilities would be those in which it has over 50% stakes, which only consist of a few companies. Time dotCom Bhd and Proton Holdings Bhd could be next as “Khazanah has always talked about divesting its interest in these companies.”

Khazanah doesn’t need the funds. It’s in line with the Government’s call to free up more liquidity to attract foreign investors. The sale proceeds, nonetheless, could be pumped into Iskandar Malaysia.

The reduction in shareholding should not have an impact on the transformation programme that the GLCs were undergoing since Khazanah still owned substantial stakes. As long as Khazanah maintains its position as one of the key shareholders, it should not be an issue. Khazanah could still retain control as long as it had board representation in the companies.

The 5% selldown in MAHB is (of) no impact. What is 5% when its stake was over 70%?. With the sales proceeds, Khazanah could boost its exposure in the services and high technology sectors. Also expecting Khazanah to tap offshore opportunities especially since asset classes in the US and Europe remain at low levels.

Meanwhile, Takrif Aspirasi Sdn Bhd, CIMB Group Holdings Bhd’s eighth biggest shareholder, sold 30 million of the bank’s shares, representing 0.8%, at RM10.38 each, valuing the block at RM311.4mil. The report did not identify the buyer of the shares.
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A total of 55 million MAHB shares were traded in three off-market transactions at RM3.30 per share for a total of RM181.5 million. The transactions, involving a combined 5% stake of MAHB, have given rise to speculation that it could be the government’s investment arm Khazanah Nasional Bhd paring down its stake in the airport operator.

Khazanah has a 72.74% stake in MAHB, which has a free float of about 27.26% representing 299.85 million shares in the company.Sources said buyers in those off-market deals were most likely local and foreign institutional funds. Talk has it that CIMB Investment Bank Bhd has been mandated to help Khazanah sell down its stake in line with Prime Minister Datuk Seri Najib Razak’s call to government-linked companies (GLCs) to increase their stock liquidity.

Interestingly, CIMB group chief executive officer Datuk Seri Nazir Razak was quoted as saying that the entry of foreign sovereign wealth funds, particularly from China, would be good for the country as it would create greater connectivity with the fastest-growing economy in the world.Second Finance Minister Datuk Ahmad Husni Hanadzlah later denied the report.If Khazanah was the seller in MAHB, then more selldowns could be expected in the coming weeks (2009 & Beyond), including those in other GLCs, as the environment now (Sept 2009) is conducive given the improved investor sentiment.It has often been argued that GLCs, which make up some of the largest capitalised companies on the local bourse, have not been able to adequately garner foreign investor interest due to the illiquidity of their shares, the bulk of which is held by government institutions.

It is believed that GLCs’ share prices could improve in line with any enhancement in liquidity.The government’s move to pare down its stakes, if confirmed, would be positive for the local market and help to increase the attractiveness of such counters in the eyes of investors.There were keen interests all along in most of these GLCs. Many more such moves might follow suit, and MAHB could be the first among the pack.