Jan 3, 2012

Malaysia - What the market experts expect in 2012



Wong Ming Tek, executive director and head of research, HwangDBS Vickers Research Sdn Bhd

1. Do you think 2012 will be a better year for the stock markets compared with 2011?

Volatility will continue as we enter 2012 largely driven by the lack of clarity in the fiscal union measures and sustainable resolutions to eurozone debt crisis as well as US debt deficit problem. One thing for sure is that should there be any sign of growth from the developed economies, it will be painfully slow.

That will cause ripple effect towards the emerging markets and Asia, which could lead to slower exports and growth. However, it is not all doom and gloom. The good news is, data points from US and China have been surprisingly resilient of late, and we hope it will sustain its momentum in 2012.

Back in our home ground, our guided corporate earnings growth for the full year of 2011 stays at 9% and 13% in 2012 as the latter rebounds from a lower base the year before. The strength of earnings in 2012 should provide support to the downside risk in our local stock market.

2. What are the strategies investors should employ in their investment decisions?

Investor with a one-year time horizon, reasonable risk appetite for equities can opt for dividend plays as it smoothens out the volatility in one's portfolio. Within this space, we would recommend stocks with strong fundamentals, but are trading at attractive valuations.

In this case, one can consider the beneficiaries of the Economic Transformation Programme (ETP) as the effects filter through and continue to gain traction in the coming quarters. As such, we are keen on domestic-oriented construction sector such as IJM Corp, Gamuda and MRCB. For specific dividend stocks, we like Berjaya Sports Toto and Alliance Financial Group.

Berjaya Sports Toto is favoured due to:

a) sales for number forecast operations should remain resilient given the relatively inelastic demand;
b) earnings growth potential has improved with the launch of 4D Jackpot which should continue to gain popularity with rising awareness and a young population; and
c) low beta play that offers an attractive dividend yield.

Alliance Financial Group is one of our top picks as it is:

a) the cheapest in our bank universe;
b) building up SME franchise while leveraging on deposit strength;
c) driving its ROE from non-interest income; and
d) attractive in terms of valuations, coupled with strong earnings visibility.

3. What are the challenges expected next year?

a) The Euro & US debt saga continues
b) A potentially disorderly break-up of the EU bloc
c) Euro debt crisis morphing into a EU-US financial crisis
d) General election in Malaysia, as the outcome could be very binary and this pose risk in the market
e) Black swan events such as natural disasters or unexpected political turmoil

4. Target for FBM KLCI for 2012.

Our 2012 year-end KLCI target is 1,590, based on 14x forward earnings. In the near term, the basis of our computation is due to the coordinated measures by the six global central banks, which have boosted near-term sentiment. We might also see the occasional market uptick and Capricorn Effects. Historically, December and January tend to be good months with average KLCI gains of 2.3% and 1.7% over the last 10 years. However, there needs to be more structural policy measures in Europe to support a sustainable market uptrend over 2012.

Vivien Loh, deputy chief investment officer, Phillip Capital Management Sdn Bhd

1. Do you think 2012 will be a better year for the unit trust/stock markets compared with 2011?

We think 2012 will be just as volatile and uncertain as 2011 for global equity markets. In the near term, we think that volatility for markets will remain high as Europe's politicians are to come up with workable solutions. The main determinant for global markets to move higher is whether EU authority is effective enough to address the debt crisis.

Europe will face a challenging year in terms of economic performance that will weigh on global growth and, yes, there will be a slowdown in global and regional growth, but the performance of Asian equities to date suggests that regional economies are heading towards a global slowdown or maybe a recession next year!

Regional equities are still trading way below their 10-year historical averages despite their 6% growth in 2011. We think that towards the first half of 2012, there will be recovery for our oversold, under-priced and under-owned Asian stocks. As at the domestic front, Malaysia market may be positive before the next general election.

Malaysia is defensive in bear markets. A resilient domestic-driven earnings profile, low foreign share holdings of Malaysian equities and strong participation of government-linked investment funds in Malaysian equities will cushion the market downside risk.

The US continues to puzzle investors with sterling growth results, on the back of quantitative easing and job creation policies. US economy has performed better than most had expected over the last quarter, showing a growth of 2.2% in 2012, compared with zero growth in the eurozone. In our view, emerging markets and the United States should keep the world economy from falling into a recession.
This is based on the assumption that the eurozone's sovereign debt crisis will not erupt into a new global economic crisis.

For year 2012, we believe that equity is an asset class that investors should pay attention to.

The reasons being:

a) Investors have raised their cash level to the highest in a year in December due to the severe uncertainty surrounding 2012. The eurozone crisis was the key concern. Whatever the eurozone's future, the effects of the debt crisis has already been felt across the world.
b) Investors are still putting their money into low-yielding bonds, a reflection of strong risk aversion. However, as the divergence between the returns on offer from bonds and equities becomes wider, equities may be the main beneficiary, especially when many blue-chip companies pay higher dividend yields than their own corporate bonds.
c) The environment with weak growth in 2012 may compel the Federal Reserve to launch a third round of quantitative easing (QE) and this will be positive for riskier assets such as equities and the European Central Bank may provide cheap liquidity to strengthen banks.
d) Inflation is still a risk and it erodes the value of a fixed-rate return and investors will demand a higher return to compensate for such a risk.

2. What are the strategies investors should employ in their investment decisions?

We believe 2012 offers a wide trading range for investors and one has to stay nimble to take advantage of the market volatility. Any sell-down of the equity markets should continue to provide opportunity to accumulate stocks with potential and sustainable growth. Then, they're able to sell on companies that reach their fair valuation.

3. What are the challenges expected next year?

The European debt crisis remains a potential de-stabilising factor for the global economic and financial markets. Political risks also cloud the outlook further, with elections and leadership changes in the most powerful countries and the prospect of continuing turmoil in the Middle East.

To pick the performing stocks and right timing to enter into the market are real challenges in year 2012 amidst market volatility arise from the risks mentioned above.

4. Top stock picks of the year and target for FBM KLCI for 2012.

a) Benalec
b) MBSB
c) Yinson

We believe there are pockets of opportunities available in Malaysia and the market trend before the next general election should be on the upside. And we will need to be more selective in our stock picking. The target level for FBM KLCI is just an indication of the market trend and is derive from the top 30 stocks in the KLCI Index.

Chris Eng, director of OSK Research Sdn Bhd

1. Do you think 2012 will be a better year for the unit trust/stock markets compared with 2011?

Considering the closing KLCI level of 1518 pts in 2010, and the fluctuations in 2011 since, I believe 2012 will hold similar fortunes. Our 2012 Fair value is 1466 pts which is not too far away from the KLCI level now. I expect there to be some strengthening of the KLCI in 2H2012 but it may not be too spectacular.

2. What are the strategies investors should employ in their investment decisions?

We advise investors to be generally defensive and to focus on consumer, telco and healthcare sectors. But watch out for trading opportunities. To buy when the KLCI drops towards the 1300 pts and to sell when the KLCI rises towards the 1500 pts. Investors need to trade in banking, oil and gas and construction sectors.

3. What are the challenges expected next year?

A recession in Europe, reduction in Malaysian subsidies after the general election and delays in ETP-related projects.

4. Top stock picks of the year and target for FBM KLCI for 2012.

2012 FV is 1466 pts. It's not a year-end target, which we don't have yet. Top stock picks are Maybank, Axiata, PetGas, TM, AirAsia, Dialog, KPJ, QL, Media Chinese and TRC Synergy.

Bernard Ching, head, Alliance Research Sdn Bhd

1. Do you think 2012 will be a better year for the unit trust/stock markets compared with 2011?

I believe 2012 will be a challenging year. The external environment does not look pretty at all. Sovereign debt crisis in the eurozone is far from over despite numerous 'final solutions' being proposed by European leaders over the past year. It is like a chronic heart disease.

The European leaders are still arguing that unhealthy diet (past fiscal indiscipline) was one of the causes for the disease and demand that a proper dietary (fiscal consolidation) plan be formulated before a bypass operation (capital injection) can be undertaken. But the patient (eurozone) may not live long enough!

Obviously, the impact of a eurozone breakup and/or severe credit crunch would have a far reaching consequences on emerging economies as the eurozone is a key export market for the emerging economies.

That said, all is not doom and gloom. Emerging economies are still fairly resilient as domestic consumption has been rising over the years while US economy is recovering, albeit slowly.
Malaysia should be able to partly mitigate any slowdown on the external front by strong domestic consumption following the government's recent Budget 2012 announcement which put more money into the hands of the rakyat, especially civil servants.

Meanwhile, implementation of projects under the Economic Transformation Programme (ETP) should underpin near-term capital formation. Despite the silver lining, investors are advised to remain cautious as Malaysian equity valuation is not compelling at the moment. At current level (1,477.78 as at Dec 19), our best case end-2012 FBMKLCI target is 1600 (based on 15x P/E) which implies only 8.3% upside. But market is not going to get to that level in a lockstep manner. Instead, we anticipate wide swing with support at 1,380 (based on 13x P/E).

2. What are the strategies investors should employ in their investment decisions?

We advocate exposure to selective sector/stocks as oppose to broad base accumulation. We like defensive sectors such as telecommunication, consumer staple and retail REIT which have stable earnings and high dividend yield. Key themes to watch over the next six months are:

a) further liberalisation of the financial sector which may be the catalyst for another round of M&A activities in the banking sector;

b) general election which may see rotational pre-election play on politically linked stocks such as UEM Land and MRCB. However, we caution investors of potential increase in volatility as polling draws nearer due to political uncertainty. Post-election, we expect Tenaga to be re-rated with better clarity on tariff adjustment and normalisation of gas supply;

c) ETP implementation which may see significant uptick in contract wins by construction players like Gamuda, IJM, and MRCB; and,

d) retail consumption play riding on Euro 2012 and Dragon year which we believe will benefit brewery sector the most.

In addition, should the market hold up (which depend very much on external outlook), we could potentially see more IPOs such as Felda Global, Gas Malaysia, Malakoff and Astro, and GLC divestments such as Proton, Affin and Boustead.

The Sun Daily



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