MAXIS
1. Why List Maxis After Delisted On 2007?;
2. The Prelisting Restructuring Of Maxis & Binariang;
3. What Is The Upside For Ananda and Binariang After Maxis Bhd Is Relisted?;
4. The Question Is, Will Maxis Be Able To List Rm5 a Share Or More?;
5. The New Versus Old Maxis;
6. Given Tougher Market Conditions, The Question Is. What Kind Of Growth Can Maxis Deliver
In The Current (2009) Environment?
7. Valuations Of Maxis;
8. Maxis Vs Axiata & DIGI
Saudi Telecom Co (STC) has a 25% stake in Binariang GSM Sdn Bhd, the parent company of Maxis.
Two years ago (2007), MAXIS was taken private in a RM39 billion exercise.
By relisting MAXIS, Ananda gains big time on three counts …
·He is relisting only his Malaysian teleco assets whereas the MAXIS he took private in 2007 included international assets.
·Through a series of deft pre-IPO restructuring, Binariang, which he controls privately, will raise billions in cash that will enable him to retire virtually all the debt he and Binariang had taken to privatize MAXIS if he chose to. In short, Binariang will be able to pay the bulk of its debts and still end up controlling 70% of the relisted MAXIS
·Ananda will score brownie points with Najib, who is also finance minister and who wants to put Bursa back on the radar screen of international fund managers the way Malaysia was in the 1990s. To achieve this, Bursa needs more profitable big companies.
At the same time, Binariang need to restructure its debts. Binariang has three denominated debts of RM21 billion and US dollar denominated debt paper of US$900 million. Sources say Binariang needed to shore up its balance sheet to continue to enjoy a debt rating of AA (2) and A (3) respectively for the ringgit and US dollar debts.
The say Binariang needed to inject more money into its Indian telco Aircel Cellular Ltd, but it would have been difficult for it to borrow unless it restructured its existing debt. They also say the global financial crisis meant bank borrowings had become more difficult and expensive.
It was a combination of the financial crisis, which made the US dollar borrowing expensive, and Maxis’ Indian operations requiring capital to expand market share that led to the restructuring of Maxis and listing of its Malaysian arm.
The Indian operation is key to Ananda’s realizing his dream to have a cellular mobile empire with strong presence across Asia.
When Maxis was taken private in 2007, it was primarily because the listed company would incur massive debt due to its operations in India and Indonesia, something that would damp its share price performance. Moreover, the cash being paid as dividends could be used to fund expansion.
Binariang later sold a 51% interest in its Indonesian arm PT Natrindo Telepon Seluler to STC, leaving it and Maxis with Aircel as its major overseas investment.
To compete aggressively, Aircel needs more capital, an asset not all shareholders of Binariang may be comfortable with.
The biggest shareholder of Binariang is Ananda, with a37% stake, followed by Harapan Nusantara Sdn Bhd, with 30%. STC holds 25% equity stake while Shield Estate NV, a vehicle linked to Ananda has 8%.
Aircel’s capital expansion programme over the next four years (2010-2013) is about RM16.4 billion and this is expected to be primarily financed via additional equity and/or debt.
In line with Aircel’s funding needs, the group (Binariang) debt load is expected to balloon to around RM25 billion in 2010 (from RM21 billion as at Dec 2008).
It was the rating rationale that gave the market the first indication of the need for Binariang to undergo a restructuring to give Aircel additional funds to accelerate expansion.
The restructuring and relisting of Maxis are being done in a manner that will solve Binariang’s balance sheet and funding woes and give the company the flexibility to expand in India and other countries without burdening shareholders.
MCB will list its Malaysian arm Maxis Bhd by divesting 30% or 2.25 billion shares to investors. MCB is wholly owned by Binariang.
Assuming the sale is done at Rm5 per share, the divestment will net MCB some RM11.3 billion and value the Malaysian assets at RM37.7 billion. This compares with the RM39 billion valuation of Maxis that included its entire Malaysian and overseas assets when it was taken private.
Also, prior to the relisting, MCB is undergoing a restructuring that will see Maxis acquiring assets from the parent (MCB) for close to Rm4 billion and also receiving a dividend payment amounting to RM4.03 billion.
As a result of the pre-listing restructuring, Maxis will owe MCB RM4.99 billion. Maxis will seek Rm5 billion long term external debt to repay the debt.
Apart from that, four subsidiaries of MCB have declared dividends to MCB to the tune of RM4.03 billion before the upcoming listing .Of this amount, some RM2.84billion was paid in cash. The remaining RM1.18 billion will be settled by Maxis from the Rm5 billion borrowing. The dividends were declared by utilizing the retained earnings of four subsidiaries, which will come under the Malaysian arm Maxis after the listing.
Apart from dividends from the four subsidiaries, Binariang also received dividends to the tune of RM290 million in respect of redeemable convertible preference shares in Maxis Broadband.
In a nutshell, even prior to the listing, MCB (which is 100% owned by Binariang) will receive Rm7.84 billion in dividends and divestment of assets arising from the prelisting restructuring. Together with the RM290 million that Binariang received for its preference shares, the total sum MCB will ;ay the holding company is more than RM8 billion.
Add the post IPO proceeds of some RM11.3 billion (assuming the sale of 30% of Maxis is done at RM5 per share) to the Rm8 billion and the total proceeds that Binariang will get are more than a whopping RM19 billion. That is not too far off the cost incurred by Ananda and Binariang when they took Maxis private.
Then, Binariang had piled on ringgit debt papers of RM21 billion that were used to buy out old Maxis’ minority shareholders.
What is the upside for Ananda and Binariang after Maxis Bhd is relisted?
When Maxis was take private, it had both the international and local businesses. Now (Sept 2009), only the local arm is being relisted and the proceeds received will almost cover the debt incurred in taking Maxis private, if the shares are sold at Rm5 and above.
Effectively, if the shares are sold at Rm5, this will value the Malaysian operations at Rm37.7 billion. When Maxis was privatized at RM15.60 per share, the company’s market capitalization stood at Rm39 billion.
Also, after taking Maxis private, STC invested a total of US$3.1 billion to take a 51% stake in Maxis Indonesian operations and a 25% stake in Binariang. This was done via an issue of new shares, which meant the money went to Binariang’s coffers, hence reducing its cost of taking the old Maxis private by some RM10 billion.
The funds from STC are said to have been channeled into Binariang‘s overseas operations. Also, STC, together with Binariang, jointly underwrote a US$900 million loan for the Indian expansion.
If Ananda can raise enough funds from the relisting to pay off the ringgit papers raised to fund the fund the privatization of Maxis, he will free Binariang from a substantial amount of debt and still end up owning 70% of a listed Maxis and 100% of MCB’s overseas arm.
But the question is, will Maxis be able to list RM5 a share or more?
So far, based on reports, the valuations given to Maxis range from Rm4 to Rm6, depending on the kind of valuation method.
If based on EV/Ebitda, a RM5 tag is too high as it would translate to more than nine times EV/Edita. On the other had, if Maxis is positioned as a dividend play, it can fetch a higher price of about rm5 a share. But then if investor is looking at dividend play, there are other options such as DIGI and Axiata.
A New Versus Old Maxis
When Maxis or old Maxis debuted on the Main Board in July 2002 with just over three million subscribers, Malaysia mobile penetration rate was under 40%. By the time it was privatized five years ago in July 2007, Malaysia’s mobile penetration rate had gone just above 90% and its subscriber base had more than tripled.
Between 2006 and 2008, Maxis’ revenue grew 21.5% to Rm8.45 billion in FY2008 from RM6.96 billion in FY2006 even as its mobile subscriber base expanded around 18% a year in Dec 2008 from Dec 2006. Mobile revenue, which made up over 90% of Maxis group revenue, grew 20.4% to RM7.9 billion in 2008 from Rm6.5 billion in 2006.
Today (2009), Malaysia’s mobile penetration rate is already above 100% alongside regional countries. Mobile operators are now (2009) looking to services such as mobile broadband as well as value added 3G data services to grow or maintain average revenue per user numbers.
The battle for price sensitive prepaid users has also become cutthroat, with at least four active mobile virtual network operators selling rebranding mobile services rising Celcom Bhd’s network.
And it is in this scenario of a highly competitive near saturated market than Maxis Bhd or the new Maxis is seeking to list on the Main Board without its sister companies in India and Indonesia that are still in the red due to start up losses.
Given tougher market conditions, the question is. What kind of growth can Maxis deliver in the current (2009) environment?
From the growth that Maxis has delivered over the past two years under the new group CEO, the need to perform remains imperative. Maxis os after all still under AK company.
In Malaysia, Maxis is still the leading mobile operator, with its 11.25 million subscriber base, commanding 40% of the market ahead of Celcom’s 34%, Digi’s 25% and U Mobile’s 0.7%. Maxis’s revenue market share also remains the largest.
However, due to competitive pressures, Maxis’ Ebita margin fell for the six months ended June 2009. Celcom’ slide however was relatively smaller.
There are also Maxis dominance coming under threat.
Its postpaid revenue market share has slipped below the 50% mark. It is also no longer the leader in terms of prepaid ARPU. Maxis was the only one of the big time operators to lose prepaid subscriber market share in 1H2009.
Celcom has made known its intention to unseat Maxis as market leader by 2011.
In terms of mobile broadband users, Celcom has been more successful in growing its subscriber base.
Nonetheless, the fact remains that competition is getting tougher and margins are being eroded. Without the potential growth factor from markets abroad, Maxis’ valuations would likely be closely tied to its ability to generate cash and pay dividends.
At the indicative IPO price of for institutional investors is RM5.50 apiece and retail price of Rm4.95) to be fair as it would imply an equity valuation of RM37.1 billion or 16.3 times annualized 1HFY2009 earnings and nine times EV/Ebita.
The valuation is on par with the prospective PER of 14 to 16 times at which domestic and regional mobile companies are trading..
Be that as it may, the absence of the potential growth factor from markets abroad and heightening competition in a near saturated market at home mean it would be tough for the new Maxis to outshine the old Maxis.
Maxis Vs Axiata & DIGI …
One of the key investment merits for Maxis was the strong cash flow from its domestic operations, hence, the ability to sustain good dividends going forward (targeted payout of 75%). Maxis provided investors with a strong alternative as an income stock, though the local cellular telephony space was “close to saturation (over 100% penetration)”.
Maxis's re-entry into the public domain has raised speculation about its impact on Axiata and DiGi.
Maxis has 11.4 million subscribers representing about 40% of the estimated 28.5 million mobile subscriptions in Malaysia. MCB announced it would sell a 30% stake comprising 2.25 billion shares in Maxis Bhd, which consolidates its Malaysian operations. Of that, 2.075 billion shares will be offered to institutions and the remaining 174.79 million shares to the public and customers. After the corporate exercise, MCB would hold 5.25 billion shares, representing 70% of Maxis’ paid-up capital.
Based on the announcement, this would see members of the public owning a very small stake in the company.
As at June 30, 2009, Maxis had deposits, cash and bank balances of RM1.88 billion. For the first half ended June 30, 2009, it posted a net profit of RM1.41 billion.
Some believe there may be a realignment and shifting of portfolio in the sector upon Maxis’ re-entry. Nonetheless, Axiata — when compared with Maxis — was a more compelling longer-term exposure given its strong regional growth prospects which would provide more superior earnings upside. Meanwhile Maxis’ relisting would impact DiGi more than Axiata due to the former’s much lower trading liquidity and market capitalisation.
The key factor that the major shareholders need to take into consideration was the listing pitch, given that Maxis was once perceived to be a darling stock with strong regional prospects and good dividend yields.
Based on shareholding data from individual companies, foreign shareholding in telcos was at an all-time low in June 2009 despite the improved market appetite since March 2009. This was because Malaysian telecom stocks are perceived to be trading at a premium relative to their peers in Indonesia, Singapore and Thailand.
Telekom Malaysia’s foreign shareholding fell from 15.9% at the end of 2008 to 10.6% at end-June 2009 while DiGi’s foreign shareholding (excluding Telenor) tumbled from 15% to 11% during the same period. It is believed Axiata saw a slight expansion in foreign interest following the increased weightage under the new FBM KLCI after hitting a low of 8.4% in June 2009.
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The top reasons for investing in soon-to-be-listed telecommunications company (telco) Maxis Bhd (Maxis Malaysia) are its potentially high-dividend yield, dominant share of the local mobile market and superior margins.
Maxis Malaysia, the year's most anticipated initial public offering (IPO), is largely expected to be listed in November 2009 with a go-to-market valuation of around RM37 billion to RM40 billion.
Maxis Malaysia's key investment merits are its target dividend yield of over 5 per cent on the back of the domestic operation's strong and steady cashflow, dominant share of the domestic mobile market and superior margins.
The listed entity, which will comprise only Maxis Communication Bhd's domestic operations, could have a negative impact on other listed telcos such as DiGi.Com Bhd and Telekom Malaysia Bhd (TM). It is believed that Maxis Malaysia's "significantly" higher profile, market capitalisation and trading liquidity, investors are likely to switch to it from DiGi.Com and, to a certain extent, TM.
Industry observers believe the re-listing of Maxis will be negative for DiGi.Com given (the latter's) smaller share liquidity and market capitalisation and Maxis' relatively more superior EBITDA (earnings before interest, tax, depreciation and amortisation) margin and dividend payout potential.
Meanwhile, as Maxis will be relisted without its overseas operations, it is not seen as a direct threat to Axiata. Axiata provides a more compelling longer-term investment proposition given its regional footprint in 10 countries.
MAXIS deserves premium valuation over DiGi (PE multiple of 16 times) but a discount to TM's fixed-line and broadband monopoly (20 times).
Expecting Maxis to be included as a component stock of the FBM KLCI, which would be a boon for index-linked funds.
Thursday, October 15, 2009
Monday, October 12, 2009
Market Commentaries & Technical Analysis as at 12 Oct 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. Eastern Corridor Development Programme (Petronas-Led)
6. Northern Corridor Economic Region
7. Sarawak Region Corridor
8. The Sabah Development Corridor
9. Sarawak Corridor of Renewable Energy (Score)
10. The Asia Petroleum Hub In Johor
11. The Solid Waste Management Play
12. Flow of OPEC Petrodollars
13. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***
14. Iskander Development Region (IDR) In South Johor
15. RM40 Billion Public Transport Expenditure
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 (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 23 Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009 (Delay To Nov 2009);
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension);
4. Upcoming Maxis IPO;
5. More Construction Contracts, O&G Projects& Liberalisation Measures Of The Services Industry
Technical Analysis
The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index were fast reaching the overbought area after flashing a buy on Oct 1 2009.
Another short-term pointer, namely the 14-day relative strength index continued to improve, firming from the mid-range to the 70 points level.
Meanwhile, the daily moving average convergence/divergence (MACD) histogram climbed over the daily signal line to trigger a buy.
However, weekly measurements were very much the unchanged, with the weekly slow-stochastic momentum index curving down from the top and the weekly MACD in danger of falling below the weekly signal line.
Bursa Malaysia traded firmer, with the key index hitting a near 16-month high of 1,236.89 during intra-day week session on renewed bargain hunting nibbling, largely encouraged by a solid showing in overseas markets.
The FBM KLCI had penetrated the recent peak of 1,231.49. Theoretically, a breakthrough of such would clear the path for an uptrend continuation due to development ahead, given the improvement in global market sentiment and macro economy.
However, for the bulls to charge ahead in style, we need to see more concrete signs of economic revival and most importantly, bigger volumes. Otherwise, the bulls will not run far from here (12 Oct 2009), given the prevailing limited investors’ confidence and liquidity in the market.
Technically, indicators are on the mend, especially the daily MACD, suggesting a steadier trend this week, with initial resistance envisaged at 1,240-1,250 points band.
The next upper hurdle is resting at 1,260 points, followed by 1,280 points.
Support is expected at 1,231.49 points, 1,220 points, 1,196.46-1,200 points range. If the important lower floor of 1,191, also the 50-day simple moving average line is violated, investors should be prepared for more downward journey on increase liquidation pressure.
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;
5. State Of The Global Economy (Rate Of Decline Has Started To Moderate Since March 2009 With Strong Signs Of Recovering);
6. Commodities Prices (Strengthening Especially Gold & Silver);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis
Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
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. Global Monetary & Fiscal Policy (The Exit Strategy): Recovering Economy, Weakening US Dollar, High Commodity Prices & Inflation Expectations Building Up
b. The US Equities Market: A Bubble Is In The Forming
c. The Malaysian Equities Outlook: 5 (Optimistic), 4 (Neutral), 3 (Pessimistic)
d. Global Inflation Outlook: Controlled Versus High
e. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009
f. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
g. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
h. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
i. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
j. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
k. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
l. 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
m. What’s NEXT For The US & China Equities Market
n. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
o. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
p. What’s NEXT (2H2009) For The Malaysian Equities Market …
q. Carry Trades Are Making A Come Back Into Emerging Markets
r. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).
a. Global Monetary Policy & Fiscal Policy (The Exit Strategy)
i. The Global Monetary Policy …
A weakening US dollar and rising commodity prices led by gold are once again heralding the risk of rising inflation even as the global economy begins to recover.
Having taken a break for most of 2008 because of recession’s dampening impact on demand, inflation is expected to be one of the major challenges for policymakers across the globe in 2010.
They cite three main reasons: a weakening US dollar as it losses its safe haven status amid the global economic recovery; the timing and ability of policymakers in key industrialized countries to pull back the huge amount of liquidity injected into the world’s financial markets by the loose monetary policy implemented during the recession to boost growth; and rising commodity price, spurred by a weaker greenback and rising demand.
A weakening US dollar makes commodities attractive because most of them are traded in the US currency. Investors are taking flight to precious metals, especially gold, to preserve the value of their US dollar assets and also to hedge against inflation.
The general view is that the US dollar will likely to face downward pressure in the months ahead (Oct 2009 & Beyond) as global recovery picks up pace. Additionally, the US currency is being driven down by the huge twin deficits as well as talk of attempts by some Arab countries – together with China, Japan and France – to end US dollar trade in crude oil.
The plan is to move trade in oil from the US dollar to a basket of currencies comprising a unified currency for the Gulf economies, the yen, the euro and the yuan.
As an aside, this shift is unlikely to happen in the short term, given the several of the Gulf states have long been talking about a unified currency but with little to show for it.
A continued weakness in the US dollar will boost commodities. Rising commodity prices, including that of crude oil, will fuel inflationary pressures and may pose a threat at a time when the world economy is just beginning to recover from one of its worst recessions ever.
This is because inflation in an environment of low growth will pose dilemma for monetary policy. Policymakers will have to perform a delicate balancing act between raising rates to dampen inflationary pressures and boosting growth.
It must be noted that while the global economy is recovering better than expected, industrialized countries are still facing high unemployment rates, thus hindering a pick up in consumption spending.
The consensus among economists is interest rates have bottomed out and will likely start rising again as we move into 2010.
What this signals is that liquidity in the financial systems will gradually be tightened, going forward, and that there is a turnaround from deflationary to inflationary fears among investors.
Most Asian central banks are not likely to raise rates significantly even in 2010 because of concerns that higher rates will cause their currencies to appreciate, which will in turn erode the competiveness of their exports at a tme when exports are still a key growth driver.
Boosting growth will still be priority, which means that any rate hikes by Bank Negara will likely be small.
The Asia Monetary Policy …
The tide of monetary policy in Asia has turned. The Reserve Bank of Australia's interest rate increase in early Oct 2009 likely kicks off rate hikes across the region in coming months (Oct 2009 & Beyond).
Further withdrawal of monetary policy stimulus measures is inevitable. However, tightening will be gradual, given persistent uncertainty.
Oct 2009 crystallized the fact that the tide of monetary policy in the Asia-Pacific region has turned.
The Reserve Bank of Australia raised the official cash rate by 25 basis points to 3.25%. In doing so, the RBA became only the second central bank in a developed country — after Israel's — to raise interest rates this year (2009).
This move likely kicks off interest rate increases across the region in coming months (Oct 2009 & Beyond).
Speculation regarding imminent interest rate movements in the Asia-Pacific region has been growing. Central banks in China, India and South Korea are keeping a close watch on rising economic activity and emerging inflation pressures.
As sentiment in global financial markets improves and signs emerge that global growth is resuming, it is inevitable that central banks in the region will raise interest rates from their current emergency levels (Oct 2009).
Gradually lessening the stimulus provided by monetary policy will be important in ensuring the sustainability of economic growth across the region and in keeping a lid on inflation pressures during the recovery.
However, the inevitable withdrawal of monetary policy stimulus measures will necessarily be gradual and measured. While the nascent recovery in domestic demand, industrial production and exports across the region is encouraging, uncertainty regarding the global economic outlook remains pervasive.
Many economies in Europe and the Americas are yet to emerge from recession, while the largest economy in the Asian region—Japan—remains in a delicate state. For that reason, central banks will take their time in raising rates back towards neutral levels and pause well before reaching restrictive monetary policy settings.
ii. The Fiscal Policy …
As the global recession begins to ebb and with the recovery gathering pace, the focus has turned to how the governments will exit the huge fiscal stimulus plans implemented over 2009 to pump prime growth.
The consensus is that timing is of the essence. But herein lies with uncertainty. The concern is that too early an exit will snuff out the nascent signs of recovery, while a late withdrawal could lead to serious problems further down the road, amongst which are high inflation, widening fiscal deficits and bigger government deficits.
On a more positive note, Malaysia has come up with a mid term fiscal consolidation strategy that it involves cuts in both operating and development expenditures to bring the budget deficit down to 4% by 2015.
In Oct 2009, the government has indicated that fiscal spending allocated under the two stimulus plans launched in Nov 2008 and March 2009 will draw to a close by 2010. Thereafter, the growth momentum is expected to be sustained by an improving global economy.
More importantly, over the longer term, growth should be further boosted by economic reforms under the new growth model that will help Malaysia move from a middle income to high income economy.
For now (Oct 2009), the challenge facing our policymakers is the huge deficit, estimated at 7.6% of GDP in 2009; this number could be bigger in 2010 because government revenue will likely take a hit with the slowdown in economic and business activities. This will impact profits and hence tax revenue.
It is only prudent to cut the deficit as soon as possible because we do not want the government’s debt to spin out of control, which can happen if the fiscal deficit remains at above 7% above a period of time. Having said that, the government’s debt, at 41% of GDP toady (Oct 2009) and comprising mainly domestic borrowings, is still manageable. But it is nonetheless higher than 32% of GDP in 1997.
The government has said that it cut its operating expenditure from 2010 as one of the measures to rein in the deficit. One of the ways is ensuring prudence in government spending without comprising efficiency and tightening procurement practices.
How deep will the cut be?
The grapevine has it that the government hopes to announce a cut of some 20% in its operating expenditure in the coming 2010 Budget, which will be tabled in Parliament on Oct 23, 2009.
Indeed, given that a certain degree of fiscal expansion will still be necessary in the next one year (2010), the clearest option for policy makers in the short term is to trim the government’s operating expenditure to reduce the deficit gap.
It is in the operating expenditure that the government will have the most room to manoeuvre. The excesses, unproductive subsidies, wastage and leakages of the past years show the need for a good overhaul of government operations to ensure, among others, greater cost efficiency, improved services and transparency.
An efficient public sector is critical to a country’s development because it plays a key role in facilitating the smooth running of both economic and social activities.
An interesting point to note is that some economists have estimated that efficiency in the public sector could actually add another one or two percentage points some 25% to overall GDP. This is also due to the huge involvement of the government sector in the domestic economy – it currently (Oct 2009) contributes some 25% of overall GDP.
So, how far the government can achieve the 4% budget deficit by 2015 will depend on translating the plans into action.
*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Eastern Corridor Development Programme (Petronas-Led)
6. Northern Corridor Economic Region
7. Sarawak Region Corridor
8. The Sabah Development Corridor
9. Sarawak Corridor of Renewable Energy (Score)
10. The Asia Petroleum Hub In Johor
11. The Solid Waste Management Play
12. Flow of OPEC Petrodollars
13. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***
14. Iskander Development Region (IDR) In South Johor
15. RM40 Billion Public Transport Expenditure
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 (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 23 Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009 (Delay To Nov 2009);
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension);
4. Upcoming Maxis IPO;
5. More Construction Contracts, O&G Projects& Liberalisation Measures Of The Services Industry
Technical Analysis
The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index were fast reaching the overbought area after flashing a buy on Oct 1 2009.
Another short-term pointer, namely the 14-day relative strength index continued to improve, firming from the mid-range to the 70 points level.
Meanwhile, the daily moving average convergence/divergence (MACD) histogram climbed over the daily signal line to trigger a buy.
However, weekly measurements were very much the unchanged, with the weekly slow-stochastic momentum index curving down from the top and the weekly MACD in danger of falling below the weekly signal line.
Bursa Malaysia traded firmer, with the key index hitting a near 16-month high of 1,236.89 during intra-day week session on renewed bargain hunting nibbling, largely encouraged by a solid showing in overseas markets.
The FBM KLCI had penetrated the recent peak of 1,231.49. Theoretically, a breakthrough of such would clear the path for an uptrend continuation due to development ahead, given the improvement in global market sentiment and macro economy.
However, for the bulls to charge ahead in style, we need to see more concrete signs of economic revival and most importantly, bigger volumes. Otherwise, the bulls will not run far from here (12 Oct 2009), given the prevailing limited investors’ confidence and liquidity in the market.
Technically, indicators are on the mend, especially the daily MACD, suggesting a steadier trend this week, with initial resistance envisaged at 1,240-1,250 points band.
The next upper hurdle is resting at 1,260 points, followed by 1,280 points.
Support is expected at 1,231.49 points, 1,220 points, 1,196.46-1,200 points range. If the important lower floor of 1,191, also the 50-day simple moving average line is violated, investors should be prepared for more downward journey on increase liquidation pressure.
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;
5. State Of The Global Economy (Rate Of Decline Has Started To Moderate Since March 2009 With Strong Signs Of Recovering);
6. Commodities Prices (Strengthening Especially Gold & Silver);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis
Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
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. Global Monetary & Fiscal Policy (The Exit Strategy): Recovering Economy, Weakening US Dollar, High Commodity Prices & Inflation Expectations Building Up
b. The US Equities Market: A Bubble Is In The Forming
c. The Malaysian Equities Outlook: 5 (Optimistic), 4 (Neutral), 3 (Pessimistic)
d. Global Inflation Outlook: Controlled Versus High
e. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009
f. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
g. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
h. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
i. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
j. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
k. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
l. 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
m. What’s NEXT For The US & China Equities Market
n. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
o. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
p. What’s NEXT (2H2009) For The Malaysian Equities Market …
q. Carry Trades Are Making A Come Back Into Emerging Markets
r. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).
a. Global Monetary Policy & Fiscal Policy (The Exit Strategy)
i. The Global Monetary Policy …
A weakening US dollar and rising commodity prices led by gold are once again heralding the risk of rising inflation even as the global economy begins to recover.
Having taken a break for most of 2008 because of recession’s dampening impact on demand, inflation is expected to be one of the major challenges for policymakers across the globe in 2010.
They cite three main reasons: a weakening US dollar as it losses its safe haven status amid the global economic recovery; the timing and ability of policymakers in key industrialized countries to pull back the huge amount of liquidity injected into the world’s financial markets by the loose monetary policy implemented during the recession to boost growth; and rising commodity price, spurred by a weaker greenback and rising demand.
A weakening US dollar makes commodities attractive because most of them are traded in the US currency. Investors are taking flight to precious metals, especially gold, to preserve the value of their US dollar assets and also to hedge against inflation.
The general view is that the US dollar will likely to face downward pressure in the months ahead (Oct 2009 & Beyond) as global recovery picks up pace. Additionally, the US currency is being driven down by the huge twin deficits as well as talk of attempts by some Arab countries – together with China, Japan and France – to end US dollar trade in crude oil.
The plan is to move trade in oil from the US dollar to a basket of currencies comprising a unified currency for the Gulf economies, the yen, the euro and the yuan.
As an aside, this shift is unlikely to happen in the short term, given the several of the Gulf states have long been talking about a unified currency but with little to show for it.
A continued weakness in the US dollar will boost commodities. Rising commodity prices, including that of crude oil, will fuel inflationary pressures and may pose a threat at a time when the world economy is just beginning to recover from one of its worst recessions ever.
This is because inflation in an environment of low growth will pose dilemma for monetary policy. Policymakers will have to perform a delicate balancing act between raising rates to dampen inflationary pressures and boosting growth.
It must be noted that while the global economy is recovering better than expected, industrialized countries are still facing high unemployment rates, thus hindering a pick up in consumption spending.
The consensus among economists is interest rates have bottomed out and will likely start rising again as we move into 2010.
What this signals is that liquidity in the financial systems will gradually be tightened, going forward, and that there is a turnaround from deflationary to inflationary fears among investors.
Most Asian central banks are not likely to raise rates significantly even in 2010 because of concerns that higher rates will cause their currencies to appreciate, which will in turn erode the competiveness of their exports at a tme when exports are still a key growth driver.
Boosting growth will still be priority, which means that any rate hikes by Bank Negara will likely be small.
The Asia Monetary Policy …
The tide of monetary policy in Asia has turned. The Reserve Bank of Australia's interest rate increase in early Oct 2009 likely kicks off rate hikes across the region in coming months (Oct 2009 & Beyond).
Further withdrawal of monetary policy stimulus measures is inevitable. However, tightening will be gradual, given persistent uncertainty.
Oct 2009 crystallized the fact that the tide of monetary policy in the Asia-Pacific region has turned.
The Reserve Bank of Australia raised the official cash rate by 25 basis points to 3.25%. In doing so, the RBA became only the second central bank in a developed country — after Israel's — to raise interest rates this year (2009).
This move likely kicks off interest rate increases across the region in coming months (Oct 2009 & Beyond).
Speculation regarding imminent interest rate movements in the Asia-Pacific region has been growing. Central banks in China, India and South Korea are keeping a close watch on rising economic activity and emerging inflation pressures.
As sentiment in global financial markets improves and signs emerge that global growth is resuming, it is inevitable that central banks in the region will raise interest rates from their current emergency levels (Oct 2009).
Gradually lessening the stimulus provided by monetary policy will be important in ensuring the sustainability of economic growth across the region and in keeping a lid on inflation pressures during the recovery.
However, the inevitable withdrawal of monetary policy stimulus measures will necessarily be gradual and measured. While the nascent recovery in domestic demand, industrial production and exports across the region is encouraging, uncertainty regarding the global economic outlook remains pervasive.
Many economies in Europe and the Americas are yet to emerge from recession, while the largest economy in the Asian region—Japan—remains in a delicate state. For that reason, central banks will take their time in raising rates back towards neutral levels and pause well before reaching restrictive monetary policy settings.
ii. The Fiscal Policy …
As the global recession begins to ebb and with the recovery gathering pace, the focus has turned to how the governments will exit the huge fiscal stimulus plans implemented over 2009 to pump prime growth.
The consensus is that timing is of the essence. But herein lies with uncertainty. The concern is that too early an exit will snuff out the nascent signs of recovery, while a late withdrawal could lead to serious problems further down the road, amongst which are high inflation, widening fiscal deficits and bigger government deficits.
On a more positive note, Malaysia has come up with a mid term fiscal consolidation strategy that it involves cuts in both operating and development expenditures to bring the budget deficit down to 4% by 2015.
In Oct 2009, the government has indicated that fiscal spending allocated under the two stimulus plans launched in Nov 2008 and March 2009 will draw to a close by 2010. Thereafter, the growth momentum is expected to be sustained by an improving global economy.
More importantly, over the longer term, growth should be further boosted by economic reforms under the new growth model that will help Malaysia move from a middle income to high income economy.
For now (Oct 2009), the challenge facing our policymakers is the huge deficit, estimated at 7.6% of GDP in 2009; this number could be bigger in 2010 because government revenue will likely take a hit with the slowdown in economic and business activities. This will impact profits and hence tax revenue.
It is only prudent to cut the deficit as soon as possible because we do not want the government’s debt to spin out of control, which can happen if the fiscal deficit remains at above 7% above a period of time. Having said that, the government’s debt, at 41% of GDP toady (Oct 2009) and comprising mainly domestic borrowings, is still manageable. But it is nonetheless higher than 32% of GDP in 1997.
The government has said that it cut its operating expenditure from 2010 as one of the measures to rein in the deficit. One of the ways is ensuring prudence in government spending without comprising efficiency and tightening procurement practices.
How deep will the cut be?
The grapevine has it that the government hopes to announce a cut of some 20% in its operating expenditure in the coming 2010 Budget, which will be tabled in Parliament on Oct 23, 2009.
Indeed, given that a certain degree of fiscal expansion will still be necessary in the next one year (2010), the clearest option for policy makers in the short term is to trim the government’s operating expenditure to reduce the deficit gap.
It is in the operating expenditure that the government will have the most room to manoeuvre. The excesses, unproductive subsidies, wastage and leakages of the past years show the need for a good overhaul of government operations to ensure, among others, greater cost efficiency, improved services and transparency.
An efficient public sector is critical to a country’s development because it plays a key role in facilitating the smooth running of both economic and social activities.
An interesting point to note is that some economists have estimated that efficiency in the public sector could actually add another one or two percentage points some 25% to overall GDP. This is also due to the huge involvement of the government sector in the domestic economy – it currently (Oct 2009) contributes some 25% of overall GDP.
So, how far the government can achieve the 4% budget deficit by 2015 will depend on translating the plans into action.
Monday, October 5, 2009
Market Commentaries & Technical Analysis as at 04 Oct 2009
Watch List In The Coming Week
1. 2010 Budget Announcement In 23 Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009;
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension);
4. Upcoming Maxis IPO;
5. More Construction Contracts, O&G Projects& Liberalisation Measures Of The Services Industry
Market Commentaries
Positive Factors …
While September 2009 took it by surprise with a liquidity-driven run up, profit taking took over at the end on fears of a cutback on stimulus measures worldwide.
For October 2009, with the runup to the budget, expecting a strong flow of news, which should hopefully, offset the signs of risks in global markets.
The endorsement by the G20 Finance Ministers’ meeting of the International Monetary Fund’s allocation of 161.2 billion worth of Special Drawing Rights (SDR) on Aug 28 2009, with an additional SDR21.5 billion on Sept 9 2009, gave equity markets a shot in the arm in terms of liquidity.
It was only when indications of a slowdown in mortgage securities purchases by the US Fed surfaced later in the month (Sept 2009) did profit taking set in across the globe.
While trading volume in Malaysia was expectedly weak in line with the more subdued trading during the Ramadan month, the FBM KLCI nevertheless registered a gain of 2.4% in September 2009.
The particularly newsworthy events were the unveiling of the proposed routes for the LRT line extension to Puchong and Subang, the draft prospectus for Maxis’ upcoming IPO and the placement by Khazanah Nasional Bhd of some stakes in its subsidiaries and the upcoming National Automotive Policy (NAP).
On the outlook for the October 2009, there could be a slew of positive news flow, including more construction contracts, oil and gas projects and liberalisation measures of the services industry.
The good news is that there is very little foreign participation in the market now (Oct 2009). If they return for whatever reason, it would give the stock market a badly needed boost.
While the media reported rumours that the 10th Malaysia Plan (10MP) may see a cut in development spending of 10% to RM180 billion for 2011 to 2015 compared with RM200 billion for the 9MP to allow the government to trim its budget deficit to 4% by 2015, this cut should be compensated by the carrying forward of unutilised allocation from the 9MP and that the government may step up incentives for greater private sector participation such as through PFIs or financial guarantees.
An example is the proposed permanent low-cost carrier terminal (LCCT) which will be funded by Malaysia Airports Holdings (MAHB) rather than directly by the government.
In any case, expecting a number of mega projects to be awarded over the next 12 months (Sept 2009 – Sept 2010) in the final year of the 9MP while a sizeable oil and gas project could be announced before year-end (2009).
The Risks …
The outlook for regional markets in the final quarter of 2009 is hazy, with uncertainties still loom over the global economy.
The excitement created in the markets by the ample liquidity pumped into global financial systems could evaporate if the stimulus plans fell short of their objectives.
It would be a “wait-and-see” period, while the third quarter 2009 ended on a fairly positive note for most markets on confidence boosted by some of the data coming out of the US, this might not be the case going forward.
It was important to view the markets in the context of some of the economic stimulus packages coming to expiration.
Investors have to see if the expiration of the stimulus packages would result in a pullback in the markets.Investors would tread water and the markets will move sideways until more definitive data comes out from the US.
If investors and consumers retreated in a major way should the US economy, in particular, not fully recover, it would have serious repercussions on global equity markets.
Compared to the first half of the year (2009), there appeared to be a slight slowdown in the uptrend of the local bourse. Part of the reason was that the valuations in the FBM KLCI were now (Oct 2009) rather high.
Also, the index was more reliant on the financial sector, given that commodity prices had fallen and thus affecting plantation stocks. For the market to pick up steam, there must be rotational play and, for that to happen, commodity prices have to recover.
Another reason why participation in the local market had been lukewarm of late was the government’s plan to cut spending, a move that would dampen the outlook for infrastructure and construction players.
We need a new catalyst, perhaps a recovery in commodity prices, but the conditions that permit that are not here.
All attention would be focused on what Budget 2010 brings, and the extent of the government’s budget deficit, probably there would be increases in sin taxes.
As far as the domestic stock market is concerned, it has been local funds that have kept it up, given the lack of foreign fund participation. There would invariably be a lull in the local market when foreign funds moved their investments to other exchanges that they perceived as doing better, and vice-versa.
The fortunes of the regional stock markets now (Oct 2009) lay with global issues, an important factor was how economies and consumers would respond when the fiscal stimulus measures adopted by countries like the US came to an end.
How will the governments replenish when the cash runs out? You will have to find the money first, and during that period if the consumers or investors pull back, then the markets will suffer. An economic recovery based on government stimulus alone would not last as once the stimulus expired, the economy would slump again.
However, despite the mid- to long-term uncertainties, the equity market remained in a “sweet spot” for now (Oct 2009), driven by abundant liquidity, economic and profit recoveries, easing credit policies and a low inflationary environment.
**********************************
It’s been a good run on the local bourse, but before the FBM KLCI can tirelessly speed up to the next pit stop, it needs a much needed breather before positioning for its bullish lap.
After heading north over the last six months (April 2009 – Sept 2009), and gaining 38.5% on a year-to-date (Sept 2009) basis to 1,214, it is no surprise that some resistance has emerged.
The FBM KLCI has been encountering strong selling pressure, ever since it penetrated the heavy psychological resistance level of 1,200.
The short-term negative technical reading is pointing towards a further pullback. Hence, the index may retest of the 10-day simple moving-average of 1,211 and the 1,200 psychological support soon.
Another source of concern is the Shanghai Composite Index which has broken below its short-term 30-day red moving-average line. If the Shanghai market does not break back above this short-term dynamic resistance, it could trigger an increased level of profit-taking activity among regional markets, particularly our local FBM-KLCI.
Investors are advice to be prudent and taking a little money off the table, especially with such significant gains in recent times. Moreover, Marc Faber said he would not be surprised if we have seen the peak of the market for this year (2009) because economic news is not going to improve very much.
Trading volume on the local bourse was thin during the three days as most investors were still away on the Hari Raya. Some institutional fund managers, especially government linked funds were still on Hari Raya leave.
Apart from the holidays, the lack of buying interest also contributed to low trading volume last week. The market is getting tired of the recovery story. It is at a crossroads now, awaiting fresh catalysts. Many institutional investors are on the sidelines.
Some view the market is that current valuations look a bit rich now. As a result, the market is due for correction. On the other hand, due to ample liquidity could lift the market further.
The bigger picture, however, remains positive.
In the coming weeks (Oct 2009), newsflow on new construction projects such as the RM1bil low-cost terminal and the RM7bil LRT extension will start to filter through.
Also, speculation on potential policy measures in the upcoming 2010 Budget on Oct 23 2009 could give the market a boost in the coming weeks.
Pending any tangible bearish signs, positive outlook for the FBM-KLCI remains after this wave of profit-taking activities. Owing to the absence of major negative catalysts, the index should be able to sustain above these support levels for now (Sept 2009).
Investors are advice to track the leads from Wall Street and the development of the G-20 summit in Pittsburgh to assess near-term market conditions.
The potential share placements by government-linked companies such as Khazanah Nasional Bhd as a win-win proposition for Malaysia as they improve the free-float and liquidity while giving investors the opportunity to ride on the upside of the market. Placements can also help renew foreign investor interest and drive a re-rating of the market.
By CIMB … It maintains end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price/earnings of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.
Technical Analysis
After arriving at the grossly oversold area, the oscillator per cent K climbed over the oscillator per cent D of the daily slow-stochastic momentum index to trigger a buy on Thursday.
Mirroring the trend, the 14-day relative strength index dropped to a reading of 43 during the week before ticking up to settle at xx points.
In stark contrast, the daily moving average convergence/divergence (MACD) histogram extended the negative expansion against the daily signal line to retain the bearish note. It flashed a sell on Sept 28 2009.
Weekly measurements were waning, with the weekly slow-stochastic momentum index showing an unconfirmed sell signal and the weekly MACD in danger of slipping below the trigger line.
Bursa Malaysia tripped into correction after peaking out temporarily on Sept 23 2009, which witnessed the FBM KLCI reversing from the 1,231.49 level to a low of 1,200.65 in mid-week before halting.
Based on the daily chart, the prevailing trend remains bullish but trading volume is so thin, implying many players are sitting on the sidelines or taking a cautious stance.
With the Dow suffering while US investors accentuating the negative news for the moment and the Shanghai Composite Index in great risk of a major breakdown on bearish-extended mode, as well as the absence of strong buying conviction at home, cautious mood is likely to prevail.
Technically, the downward expansion of the daily MACD and the fading weekly MACD suggest the local bourse may stay in consolidation mode this week, probably sideways until a new catalyst emerges.
The key index will face resistance at 1,220 points, 1,231.49 points, 1,240-1,250 points band, 1,260 points and the next, at 1,280 points.
Initial support is seen at 1,196.46 points. If the important floor of 1,184.77, also the 50-day simple moving average line is violated, investors should be prepared for more downward journey on increase liquidation pressure.
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;
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
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
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 US Equities Market: A Bubble Is In The Forming
b. The Malaysian Equities Outlook: 5 (Optimistic), 3 (Neutral), 3 (Pessimistic)
c. Global Inflation Outlook: Controlled Versus High
d. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009
e. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
f. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
g. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
h. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
i. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
j. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
k. 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
l. What’s NEXT For The US & China Equities Market
m. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
n. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
o. What’s NEXT (2H2009) For The Malaysian Equities Market …
p. Carry Trades Are Making A Come Back Into Emerging Markets
q. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).
a. The US Equities Market: A Bubble Is In The Forming
The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.
The slump this time (2008-2009) was so deep that the 3.5 percent average quarterly growth rate in 2010 won’t be enough to bring gross domestic product back to its $13.42 trillion pre- crisis peak. That’s in contrast with the last 10 recoveries, when GDP returned to its previous levels within 12 months.
The result: A year after the Lehman Brothers Holdings Inc. bankruptcy helped drive GDP down to an annualized $12.89 trillion in the second quarter 2009, there’s still “plenty of malaise”. Unemployment may remain close to the current (2009) 26-year high of 9.7 percent through 2010, upsetting voters ahead of mid-term Congressional elections and forcing officials to keep interest rates near zero and the budget deficit around this year (2009)’s record $1.6 trillion.
This will be the most disappointing recovery.
The U.S. might not recover the 6.9 million jobs and the $13.9 trillion in wealth lost during the recession until about the middle of the decade. The unemployment rate may never get back down to the 4.4 percent low of 2007.
Stock prices may take three or four years to reach their previous highs as the cyclical revival of the economy gradually boosts corporate profits. It will be a bull market, but not a roaring bull market.
Companies, particularly retailers such as Macy’s Inc., may have to adjust as consumers buy less. Household spending as a share of GDP might fall to its long-run historical average of 65 percent from 70 percent in the past decade (1990s) as people opt to save more.
The restrained performance that is forecast for the economy reflects both the depth and the origins of the recession, which began in December 2007. The 3.9 percent decline in gross domestic product was the most since World War II.
The decline has been a “balance-sheet recession”. Those take time to recover from, as once highly leveraged banks and consumers gradually reduce their debt.
Policy makers may have to keep interest rates low and the federal budget deficit high to push the economy forward as financial institutions and households adjust.
Federal Reserve Chairman Ben S. Bernanke and his fellow central-bank colleagues might hold their target for the federal funds rate between zero and 0.25 percent through 2010. That’s the rate at which commercial banks lend each other money overnight.
A Pessimistic Outlook ….
This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March 2009. The Federal Reserve meanwhile pronounced in Sept 2009 that "economic activity has picked up" - the most confident language the central bank has used for some time.
But some was seeing things differently and that the rally was "entering a bubble phase". They argued that markets were being distorted by governments' deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing. At some point the quantitative easing will have to come to an end but, until it does, this bull market is sponsored by [Her Majesty's Government] and everyone should enjoy it.
History is full of examples of strong rallies after big sell-offs - it is all part of the "physics" of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic "free-fall" at the end of last year (2008) appears to have been halted. In addition, the Fed's pronouncement signalled interest rates will remain low for a while - a sweet spot for risky assets such as stocks. A strong recovery for share prices since March 2009, when there was a real fear of a second Great Depression, seems reasonable.
But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year (2009). Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.
There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending - notably, Chinese stocks sold off sharply in August 2009 when authorities hinted at tightening lending.
The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally (March 2009 – Sept 2009) is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.
Relationships between markets also imply unhealthy levels of speculation. Currency and stock markets had minimal correlations before the crisis took hold in 2007, while oil and stocks were usually inversely correlated. But oil and stocks have been rising in tandem this year (2009), just as they fell together during the crisis, while the correlations between the dollar and stock markets remain remarkably close.
The implication of such correlations is alarming. Since early 2007, 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If assume that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets.
The classic definition of a bubble came from the economist Charles Kindleberger in his 1978 book Manias, Panics and Crashes . For him, a bubble is a phenomenon of mass psychology, and refers to the last stage of an investment mania, when assets are bought "not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price". The bubble bursts when there is no longer a "greater fool" ready to pay too much for the asset.
Thus, in a true bubble, stocks are wildly overvalued compared with their fundamental measures, such as their earnings or the value of the assets on their balance sheets. But conventional valuation measures of stocks (Till Sept 2009) suggest they are still far from a true bubble. US stocks are trading at a multiple of 18.7 times their average earnings for the past 10 years (1999-2009). Historically, extremes in cyclical price/earnings ratios have accurately signalled long-term market peaks and troughs. The cyclical p/e stood at 27 immediately before the crisis in 2007, for example, and reached 43 at the peak of the internet boom. So it looks premature to say stocks are in a bubble.
But an argument that this is an incipient bubble, carrying real risk that a mania will develop, is easier to sustain. First bubbles are driven by cheap credit. With US interest rates at zero, credit is very cheap. Second, many investors seem to be using bubble-like logic; they believe others will soon be prepared to buy even more.
There are true "bulls" who believe the global economy will recover strongly from here (Sept 2009), bringing up corporate earnings in its wake. But others focus on the cash that has been on the sidelines, and on the pressures on fund managers who want to avoid the embarrassment of having stayed out of the market during the rally.
The danger, in this scenario, is that lenders lose confidence in the creditworthiness of governments, which could cause rates to rise and spark a renewed sell-off. But that is not imminent (Till Sept 2009).
Just as it made sense to stay in the market while the booming mortgage market kept credit unnaturally cheap, it may make sense to do so while state intervention keeps credit unnaturally cheap. And when bonds and cash pay so little, raising the risks of inflation in the future, the rational response is to buy assets that generate more reliable cash flows, such as stocks; or that act as a hedge against inflation, such as commodities. On this logic, investors may as well heed Mr Odey and "enjoy the bubble".
When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments' assumption of banks' debts]. There's nobody left to pass it to in the future."
b. The Malaysian Equities Outlook
Optimistic Outlook …
Overseas investors become net buyers of Malaysian stocks in August 2009 as they sought “shelter” in defensive markets to evade global volatility.
Foreign funds bought US$87 million of Malaysian shares in Aug 2009 after a “selling binge” in July 2009 led to an outflow of US$121 million, the first net sales in four months.
Malaysia’s position as a low-beta and defensive market may have attracted foreign funds that were seeking shelter. September 2009 could be another month of net inflows as global markets” have been “jittery” and may shift funds to more defensive markets.
The sell-off in July 2009 may have been a “blip” given that Malaysia has been lagging behind its peers in this rebound and its valuations are becoming more “compelling”.
Foreign funds are starting to make their way back into Malaysia, with Aug 2009 experiencing a net inflow of US$87 million.
Following the improved mood, there has been a slew of upgrades for stocks on the local bourse since Aug 2009. This is the first time since Feb 2008 that the number of upgrades has exceeded the number of downgrades.
For now (Oct 2009), investors are looking at quarter to quarter to growth. As we are starting low base, things look quite positive from where we are at the moment. However, the market will anticipate a drop when the base was reached a certain level … and that is when investors will start to sell. But that is unlikely anytime soon.
By CIMB … Oct 2009
It is maintaining its overweight stance on Malaysia, the placements could help renew foreign investor interest and drive a re-rating of the market.
It remains bullish about Malaysia and maintain its end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price-earnings ratio (PER) of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.
The turnover and free float in Malaysia were among the lowest in the region, which would help explain why even Indonesia and Thailand’s recent trading volumes topped Malaysia’s despite their smaller market capitalisation.
Foreign investors appeared to have largely bypassed Malaysia in this rally as statistics from Emerging Portfolio Fund Research (EPFR) showed that foreign investors turned significant net sellers in July 2009. Foreign investors have been aggressive buyers in the rest of the region during this market upswing.
Investors will continue to look favourably upon placements by GLICs such as Khazanah as the move signals skillful execution of the government’s drive to boost market liquidity.
Also, it will not be perceived as cashing out by GLICs at the peak as the KLCI is hovering around 1,200 points and is far from its 2008 peak of above 1,500 points.
Furthermore, many local and foreign institutional funds still have significant cash positions and would want to increase exposure without driving up share prices too much.
Should Khazanah or other GLICs scale back their stakes in major blue chips, it could be positive for the share prices of the affected GLCs and the overall market liquidity and turnover. Companies in which Khazanah has more than 50% shareholding include MAS, PLUS Expressways, UEM Land and Pharmaniaga. It also has substantial holdings in companies such as Proton, Axiata, Telekom and Time Engineering where there is minimal risk of losing control.
By JF Apex … Sept 2009
Expecting more upside as more liberalisation and investor-friendly measures to come out of the budget.
The tone has already been set by Najib’s previous moves which includes the call to pare down Khazanah Nasional Bhd’s stakes in government-linked companies and bringing Maxis Communications Bhd back to the local bourse.
There may be a pre-budget rally. The objective is simple. The market needs to move. Najib appears very serious in attracting foreign investments to the market.
By KAF … Sept 2009
Expecting the 2010 budget to be a follow-through of the expansionary policies announced in the past year (2008), while continuing to focus on stimulating consumption.
Structural adjustments to the composition of the government profit & loss are unlikely although the Prime Minister has hinted at a need to manage expenses more efficiently. Overall, the budget should be market friendly and provide a nice trigger ahead of the third quarter 2009 reporting season.
It points out that the present (Early Oct 2009) correction may provide a good chance to buy quality stocks. Our markets have corrected ahead of the global market ... we had the Hungry Ghost Festival in September 2009. So, the CI’s downside is limited. If you look at the second and third liners, there is hardly any correction.
The market is looking for a reason to move to the next level.
Potential catalysts from the upcoming budget may come wrapped in the form of bigger construction projects to be awarded including the extension of the light rail transit lines estimated at RM7bil and the new Low Cost Carrier Terminal.
By Nomura … Sept 2009
Taking a cue from the past post-crisis rallies and historical earnings upgrade cycles, it remains bullish. Economic recovery should continue to underpin earnings upgrades, supported by ongoing stimulus spending.From a regional perspective, however, Malaysia could lag as cyclical markets elsewhere offered better returns.Nomura noted that in the past 1997/1998 Asian financial crisis, banks had rebounded by over 200 per cent over a 12-month basis.
By AMBank … Sept 2009
The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright.
It had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.
Anticipating a correction phase in the third quarter of 2009 “may be behind us,” or at least “the risk of pullback was dissipating.”
There were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.
More importantly, macro fundamentals are now (Sept 2009) pointing towards a start of a growth cycle moving into the fourth quarter 2009. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon.
It is forecasting gross domestic product to expand by 3% in 2010.
Historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months. Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound (April 2009 – Sept 2009) is just six months from lows.
It has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009. It expects the revision cycle to gain traction. Earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.
Neutral Outlook …
By OSK …. Sept 2009
It was “not too alarmed” with the mild profit taking currently (Sept 2009) occurring on the local market, which was “still buoyant”.The decline was in part due to the prevailing cautious sentiment in the regional markets, which fell in tandem with Wall Street.The local market was expected to trade range-bound as well as undergo some mild corrections before recovering in early October 2009.
There are still no clear indications that the US economy is out of the woods as the US Federal Reserve kept interest rates at near zero level after the Federal Open Market Committee meeting.Also, the unexpected decline in existing US home sales for the first time since March 2009 caused a minor blip, leading investors to view that a recovery in US housing was slowing down.
It was too early to judge whether the correction in the local market would turn into something major, with more concrete signs likely to appear following the end G20 summit on financial reforms.In general globally, over the last six months (April 2009 – Sept 2009), market talk on reducing fiscal stimulus or tightening monetary policy would prompt a selldown in stocks, before investors returned to the market. On the local front, the government would likely unveil “sweeteners” ahead of the Budget 2010 announcement on Oct 23, which would boost the FBM KLCI.
It believes current upgrading of stocks and earnings is happening because of improved results and the belief that the worst is over.
Currently, the stock market is still on an uptrend. Expecting some good news to flow in Oct 2009, so the feel good factor will still be there. In the case of fundamentals, things have gone past the worst. Everyone is now looking beyond 2009.
When next year (2010) comes along, we may fund that reality does not quite match what was hoped for. Earnings may disappoint investors. Therefore, the market may reach a peak in 2Q2010. Valuations too will be stretched. There will be some retracement. The correction would not be much. We have seen the worst of the economic downturn.
By Inter Pacific … Sept 2009
The decline in US home sales in August 2009 was unlikely to undermine actual sales that had grown in five out of eight months this year (2009).As such, its opinion that the latest data is unlikely to undermine the US Federal Reserve’s comments on the improving housing market and growing stability in the economy. It continues to hold in their view that the improvement in the housing market will remain modest as the real test will be when the government ends the stimulus measures.
By TA … Sept 2009
October has been touted as a negative month, more so because many of the global negative events in the past, took place during these months. Without these negative events, it’s actually quite a random trend.
But there’s opportunity in crisis.
Expecting more of a post-budget rally and anticipating investors to accumulate on confirmation of news.
The market is now correcting along with global markets. It favors the market dip a further 50 points before positioning myself for the year-end rally (2009) … has a 1,250 target for end-2009.
The short-term impact and direction of the budget on the economy and stock market are irrelevant. After all, market often reacts with knee-jerk speed and over-zealousness.
The clever investor will think: Expectations are still pretty bearish. The green shoots everyone has been talking about may turn to dead leaves. This year (2009), everyone is still complaining about a recession, the lack of execution and political uncertainty. Maybe it’s a good time to buy.
This bearish mood will hit good stocks with high dividend yields. Solid stocks will also be hit and be fleetingly cheap.
By Kim Eng Research … Sept 2009
There were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.
The stock market has risen 33% year-to-date (Sept 2009) but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.
Opine that it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points.
Pessimistic Outlook …
Investors should remain selective in holding on to their positions in the equity market amid the current (Sept 2009) bout of correction and keep an eye out for profit-taking opportunities.It was the season (Oct 2009) for investors to be nimble, paying attention to macro economic issues and be prepared to sell into rallies even though the local bourse was not expected to see any major corrections.
In the past three decades (1980s-2000s) of the Kuala Lumpur Composite Index’s (KLCI) memory, the third quarter of the year had typically been the weakest. That is why some investors shun the market from August 2009 right up to October 2009.
By Maybank Investment Bank … dated Oct 2009
It has proof to substantiate that. “Month-on-month (MoM) returns from 1977 to 2009 show that the months with the highest risk are the worst performing. Based on over 32 years of observations on MoM returns, it had identified a common trend for the FBM KLCI index as well as the Dow and Hang Seng indices. All three markets are weak in the August to October months.
For that reason, it recommends investors to “Sell” over this period and “Buy” in December 2009 and expecting the market to remain volatile as it is still in the “very high risk” zones.
A potential catalyst (or not) could be the upcoming budget 2010 which to be tabled in parliament on Oct 23 2009. Do pre and post budget market swings present an investment opportunity?
Based on the past five years, the stock market tends to show a slight downward dip in the aftermath of the budget as investors generally have high expectations, and as such, end up getting somewhat disappointed over the lack of goodies.
But as this will be Prime Minister Datuk Seri Najib Tun Razak’s first budget as he is also the Finance Minister, don’t be surprised to see market-friendly measures, despite the Government saying it is looking to reduce operating expenditure while maintaining fiscal discipline.
Compared to the regional bourses on a year to date (Oct 2009) basis, the FBM KLCI remains the second worst performer at 40.7%, only ahead of Japan.
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With the FBM KLCI making fresh highs despite having surpassed its recent 1,196.46-point peak, risks to the downside would increase significantly while potential rewards diminished.It would only be a matter of time before a steep correction set in.Bearish divergent technical signals are now (Sept 2009) very obvious. Waning potential upside would cause wise investors to dispose of stocks on the FBM KLCI on rallies.
This rise will be fraught with heavy stock liquidation. The next major impending move will be down.The local bourse was expected to stall in its saturation zone of between 1,237.25 and 1,248.34 “very soon”, and that investors should remain in a “selling mode and stay vigilant”.Investors should “dispose of stocks on any and every rebound from now (Sept 2009)”.By ECM Libra … Sept 2009
It also sees profit taking ahead for the FBM KLCI, although it expected a more positive outlook for the local market after the pullback ended.While it is uncertain whether this small profit taking wave which would morph into a significant correction or a reversal, it is always prudent to take a little money off the table first, especially after such significant gains in recent times.
By MIDE Amanah … Sept 2009
There are a lot of reasons for the global market to decline, including markets running ahead of themselves and being overvalued. Moreover, no clear solutions have been found for the problems that caused the crisis in 2008.
The structural problems remain unresolved. The US is fighting to deleverage with more money. There is not much change in the situation from six months )April 2009). A lot of it is from short term celebration.
Uncertainties over the sustainability of the global market recovery have added o investor jitters in the month of Oct.
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