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.