We were wrong on October as we had expected the market to retrace towards the lows hit in late September. Instead, global markets rallied on hopes that the European sovereign debt crises could be resolved through loan haircuts and the European Financial Stability Facility (EFSF).
For November, given the previous month’s sharp rally, we expect some pullback in global markets, with Malaysia being no exception. Barring the announcement of a general election, we remain defensive on the Malaysian market and would advocate a “buy” only if the FBM KLCI retraces towards 1,300 points, while we may call a “sell” if the market heads towards 1,533. We are “neutral” for now, with our defensive top 5 “buys” all maintained.
Rebound catches strategists on the wrong foot
October 2011 proved to be one of the best October months ever for global markets as indices in the US and Europe gained over 10% during the month. The rally, which began early in the month, caught most strategists flat-footed as earlier expectations were for a continued market meltdown. The rally was triggered by hopes that European leaders would be able to resolve the sovereign debt crisis.
While there appears to be a resolution in the form of a 50% debt haircut by banks and the agreement to leverage up the EFSF, we still see poor fundamentals in Europe as most countries are still plagued by weak economic growth and budget deficits.
Malaysia is ripe for profit taking
While Asian markets generally rebounded less than their Western counterparts, Malaysia put on a good show by climbing 7.5% in October and came in fourth among its regional peers.
Nonetheless, as with global markets, we feel the October rally was overdone and there is a strong possibility that markets worldwide may pull back somewhat in November, especially given that there are still concerns on Europe.
On the local front, the 3QFY11 results season may see some construction companies carry out kitchen-sinking exercises while plantation companies may post reduced profit on lower crude palm oil (CPO) prices.
While we continue to remain “neutral” on the market for now, we take note of the volatility and highlight the levels which are good for trading. If the market were to drop towards 1,300 points, there would be increased upside to our 1,466 fair value for 2012 and we would advocate a “buy into weakness” strategy.
On the other hand, as the market rises towards our 1,533-point projected market high, there may be increasing risk of a retracement, in which case we would advocate a “sell into strength” strategy.
While October’s top buys disappointed — apart from AirAsia Bhd — we retain all five companies for November given the strong risk of a market pullback after the sharp rally in October. We also expect all five companies to post decent enough results.
Best October since 1987?
The rebound caught strategists on the wrong foot. While the FBM KLCI hit its low towards the end of September, many other markets around the world hit bottom in early October. In fact, there was much doom and gloom surrounding world markets, with many forecasting that markets would continue to fall to new lows in the month.
The month did indeed start off badly but with expectations running high that a resolution to Greece’s sovereign debt would be reached in Europe on Oct 26, markets began to rally in the first week of October itself. With US economic data coming in surprisingly strong with 2.5% GDP growth in 3Q and the US corporate results season still looking positive, optimism of an early resolution to Europe’s problems saw markets rallying globally.
In fact, October was the best month ever in terms of percentage gains and point gains for both the Dow Jones Industrial Average and the S&P 500 indices, which jumped more than 11% each. The rally in Europe was also just as strong as the DAX rose more than 13% during the month.
While it does appear as if Greece is not about to default in the short term after banks agreed to a 50% haircut and the EFSF was geared up to €1 trillion (RM4.3 trillion), the longer-term problems of anaemic growth and budget deficits continue to plague Europe.
Asian markets’ rebound less strong
While Asia’s markets were the hardest hit in September, they still rebounded less in October, with many of the markets only seeing single-digit rebounds during the month compared with the double-digit gains in Europe and the US.
Of course, Asia’s fundamentals were not that great, as floods inundated Thailand and Indochina, typhoons hit the Philippines and a fire broke out at an oil refinery in Singapore at the end of September.
Leading the rebound was Hong Kong, with total returns of 12.95%, followed by the Philippines at 8.4% and South Korea at 7.9%. Laggards were Japan (+3.3%), China (4.6%) and Taiwan (+5.1%). Year-to-date performances saw the Philippines still in the lead with a total return of 6.5% followed by Indonesia at 4.4%.
Our call for continued weakness in the Malaysian market in October proved incorrect as it actually outperformed most of its regional peers, especially towards the end of the month.
While its peers slipped towards month-end, the FBM KLCI continued to charge ahead right up till the end of the month. In terms of the major news during the month, the most significant was the unveiling of Budget 2012 on Oct 7.
While lacking in cheer for the middle class or the broader market, the budget was perceived to be an election budget as it gave a number of goodies to the poor, including one-off cash handouts, the abolishment of school fees, civil servants’ pay hike and the continuation of subsidies.
Of course, the question remains whether all of these goodies can be sustained in the long run given the continued deficit but the focus of Budget 2012 may have been somewhat shorter term in nature. Also, the impact of Thai floods on Malaysian companies, both good and bad effects, was the focus of much of the month, given the severity of the Thai floods.
Cyclicals bounce back
Smaller cyclical stocks in the finance, oil and gas, construction and property sectors rebounded the most during the month as expected after their severe beating in previous months. However, property counters were also the worst hit, with names such as S P Setia Bhd and KLCC Property Holdings Bhd among the top 20 losers. Also losers were Proton Holdings Bhd and UMW Corp Bhd on fears the Thai floods would impact their operations given the large number of autoparts companies hit by the floods.
As mentioned, after their severe selldown in the past months, small caps saw a strong rebound in October as investors traded and looked for value.
For October, our advice that it was probably too late to sell proved correct given the market rally. Even among our calls, despite our continued “neutral” call on the overall market, value emerged for a number of stocks given the selldown in the previous two months. As such, we had more upgrades than downgrades in our earnings universe.
Outlook: Beware of profit taking
The market has indeed been volatile. Global equity markets including the FBM KLCI have been swinging wildly since the start of August, with the index going through a 386-point swing from Aug 1 through its closing low of 1,332 points on Sept 26 before rebounding to current levels.
While our calls were perfect at that time, we would at least like to think these have provided investors some form of correct guidance. We had downgraded the Malaysian market to a “neutral” on Aug 8 when the FBM KLCI was at 1,524 points. On Sept 26, while still feeling that the FBM KLCI had room to fall further, we recommended that investors not fear a recession but instead begin to “bottom nibble”, although we had mistakenly not called for aggressive “bottom fishing”.
Our call is still “buy” at 1,300, “sell” at 1,533 points. Over the past three months, given the market volatility, we have often been asked what the market’s entry and exit levels should be. Our advice has been to “buy” when the FBM KLCI fell below 1,300 points and to “sell” when it broke above the 1,533. We retain this piece of advice going forward. Nonetheless, we caution that these figures are not cast in stone and that investors may consider “buying on weakness” as the market approaches 1,300, and “selling on strength” as the market climbs towards 1,533.
The significance of these levels
Our 1,466-point fair value for the FBM KLCI in 2012 is derived from:
• 11.4% FBM KLCI corporate earnings growth in 2012
• Application of a 13.5 times price earnings ratio (PER) on the FBM KLCI earnings per share (EPS)
• Our expectations are that earnings growth could be cut to 5% in 2012 which would imply a PER of 14.5 times, below historical average PER of 16.5 times
Our 1,533-point “sell” trigger level is derived from:
• 2011 year-end target for FBM KLCI or expected high
• Half way point between 2011 fair value of 1,605 and 2012 fair value of 1,466 points
• Slightly above the FBM KLCI level when we downgraded our call
Our 1,300-point “buy” trigger level is derived from:
• 13% upside to our 2012 FBM KLCI fair value of 1,466 points
• Equivalent to a PER of 12 times based on current earnings growth projections
Despite the wild swings in the FBM KLCI, we retain our “neutral” view on the market and maintain our top 10 defensive “buys”. This is because we are not positive on the fundamental outlook. Despite the potential resolution of the sovereign debt crisis in Europe, we continue to see the whole continent remaining in a difficult position between the flagging economic growth that should require stimulus and budget deficits that have required the cutting in spending.
As such, we feel that there is still a risk of recession in Europe. While the US is not in such bad shape, there still appears to be a lack of catalysts to truly spur growth going forward.
While some have called for a major selldown on the market, we are not that negative either. We see Malaysia still avoiding a recession with the Economic Transformation Programme, if it truly kicks off in a major manner in 2012 to help spur domestic growth through infrastructure spending. Also, Asia as a whole should be able to still avoid a recession. Finally, there is still room for the general election to provide some short-term trading opportunities.
Remain defensive and beware of profit taking
Looking at the performance of our top 10 defensive “buys” since Aug 6, six out of 10 have outperformed the FBM KLCI and we continue advocating them. For November, given that the markets have rallied so strongly in October and broke above our 2012 fair value, we advocate a cautious stance as profit taking might set in.
Top “buys” maintained
Our October “top buy” call was a washout. As we had expected the market to turn south in October, we had maintained our top 5 defensive buys during the month. Unfortunately all except AirAsia disappointed given the market’s rebound.
However, since we expect profit taking to set in for November, we are maintaining the same defensive stock list of Axiata Group Bhd, Petronas Gas Bhd, Telekom Malaysia Bhd, AirAsia and KPJ Healthcare Bhd. We expect these five companies to report relatively resilient earnings as well during the 3Q11 results reporting season.
This article appeared in The Edge Financial Daily, November 4, 2011.
For November, given the previous month’s sharp rally, we expect some pullback in global markets, with Malaysia being no exception. Barring the announcement of a general election, we remain defensive on the Malaysian market and would advocate a “buy” only if the FBM KLCI retraces towards 1,300 points, while we may call a “sell” if the market heads towards 1,533. We are “neutral” for now, with our defensive top 5 “buys” all maintained.
Rebound catches strategists on the wrong foot
October 2011 proved to be one of the best October months ever for global markets as indices in the US and Europe gained over 10% during the month. The rally, which began early in the month, caught most strategists flat-footed as earlier expectations were for a continued market meltdown. The rally was triggered by hopes that European leaders would be able to resolve the sovereign debt crisis.
While there appears to be a resolution in the form of a 50% debt haircut by banks and the agreement to leverage up the EFSF, we still see poor fundamentals in Europe as most countries are still plagued by weak economic growth and budget deficits.
Malaysia is ripe for profit taking
While Asian markets generally rebounded less than their Western counterparts, Malaysia put on a good show by climbing 7.5% in October and came in fourth among its regional peers.
Nonetheless, as with global markets, we feel the October rally was overdone and there is a strong possibility that markets worldwide may pull back somewhat in November, especially given that there are still concerns on Europe.
On the local front, the 3QFY11 results season may see some construction companies carry out kitchen-sinking exercises while plantation companies may post reduced profit on lower crude palm oil (CPO) prices.
While we continue to remain “neutral” on the market for now, we take note of the volatility and highlight the levels which are good for trading. If the market were to drop towards 1,300 points, there would be increased upside to our 1,466 fair value for 2012 and we would advocate a “buy into weakness” strategy.
On the other hand, as the market rises towards our 1,533-point projected market high, there may be increasing risk of a retracement, in which case we would advocate a “sell into strength” strategy.
While October’s top buys disappointed — apart from AirAsia Bhd — we retain all five companies for November given the strong risk of a market pullback after the sharp rally in October. We also expect all five companies to post decent enough results.
Best October since 1987?
The rebound caught strategists on the wrong foot. While the FBM KLCI hit its low towards the end of September, many other markets around the world hit bottom in early October. In fact, there was much doom and gloom surrounding world markets, with many forecasting that markets would continue to fall to new lows in the month.
The month did indeed start off badly but with expectations running high that a resolution to Greece’s sovereign debt would be reached in Europe on Oct 26, markets began to rally in the first week of October itself. With US economic data coming in surprisingly strong with 2.5% GDP growth in 3Q and the US corporate results season still looking positive, optimism of an early resolution to Europe’s problems saw markets rallying globally.
In fact, October was the best month ever in terms of percentage gains and point gains for both the Dow Jones Industrial Average and the S&P 500 indices, which jumped more than 11% each. The rally in Europe was also just as strong as the DAX rose more than 13% during the month.
While it does appear as if Greece is not about to default in the short term after banks agreed to a 50% haircut and the EFSF was geared up to €1 trillion (RM4.3 trillion), the longer-term problems of anaemic growth and budget deficits continue to plague Europe.
Asian markets’ rebound less strong
While Asia’s markets were the hardest hit in September, they still rebounded less in October, with many of the markets only seeing single-digit rebounds during the month compared with the double-digit gains in Europe and the US.
Of course, Asia’s fundamentals were not that great, as floods inundated Thailand and Indochina, typhoons hit the Philippines and a fire broke out at an oil refinery in Singapore at the end of September.
Leading the rebound was Hong Kong, with total returns of 12.95%, followed by the Philippines at 8.4% and South Korea at 7.9%. Laggards were Japan (+3.3%), China (4.6%) and Taiwan (+5.1%). Year-to-date performances saw the Philippines still in the lead with a total return of 6.5% followed by Indonesia at 4.4%.
Our call for continued weakness in the Malaysian market in October proved incorrect as it actually outperformed most of its regional peers, especially towards the end of the month.
While its peers slipped towards month-end, the FBM KLCI continued to charge ahead right up till the end of the month. In terms of the major news during the month, the most significant was the unveiling of Budget 2012 on Oct 7.
While lacking in cheer for the middle class or the broader market, the budget was perceived to be an election budget as it gave a number of goodies to the poor, including one-off cash handouts, the abolishment of school fees, civil servants’ pay hike and the continuation of subsidies.
Of course, the question remains whether all of these goodies can be sustained in the long run given the continued deficit but the focus of Budget 2012 may have been somewhat shorter term in nature. Also, the impact of Thai floods on Malaysian companies, both good and bad effects, was the focus of much of the month, given the severity of the Thai floods.
Cyclicals bounce back
Smaller cyclical stocks in the finance, oil and gas, construction and property sectors rebounded the most during the month as expected after their severe beating in previous months. However, property counters were also the worst hit, with names such as S P Setia Bhd and KLCC Property Holdings Bhd among the top 20 losers. Also losers were Proton Holdings Bhd and UMW Corp Bhd on fears the Thai floods would impact their operations given the large number of autoparts companies hit by the floods.
As mentioned, after their severe selldown in the past months, small caps saw a strong rebound in October as investors traded and looked for value.
For October, our advice that it was probably too late to sell proved correct given the market rally. Even among our calls, despite our continued “neutral” call on the overall market, value emerged for a number of stocks given the selldown in the previous two months. As such, we had more upgrades than downgrades in our earnings universe.
Outlook: Beware of profit taking
The market has indeed been volatile. Global equity markets including the FBM KLCI have been swinging wildly since the start of August, with the index going through a 386-point swing from Aug 1 through its closing low of 1,332 points on Sept 26 before rebounding to current levels.
While our calls were perfect at that time, we would at least like to think these have provided investors some form of correct guidance. We had downgraded the Malaysian market to a “neutral” on Aug 8 when the FBM KLCI was at 1,524 points. On Sept 26, while still feeling that the FBM KLCI had room to fall further, we recommended that investors not fear a recession but instead begin to “bottom nibble”, although we had mistakenly not called for aggressive “bottom fishing”.
Our call is still “buy” at 1,300, “sell” at 1,533 points. Over the past three months, given the market volatility, we have often been asked what the market’s entry and exit levels should be. Our advice has been to “buy” when the FBM KLCI fell below 1,300 points and to “sell” when it broke above the 1,533. We retain this piece of advice going forward. Nonetheless, we caution that these figures are not cast in stone and that investors may consider “buying on weakness” as the market approaches 1,300, and “selling on strength” as the market climbs towards 1,533.
The significance of these levels
Our 1,466-point fair value for the FBM KLCI in 2012 is derived from:
• 11.4% FBM KLCI corporate earnings growth in 2012
• Application of a 13.5 times price earnings ratio (PER) on the FBM KLCI earnings per share (EPS)
• Our expectations are that earnings growth could be cut to 5% in 2012 which would imply a PER of 14.5 times, below historical average PER of 16.5 times
Our 1,533-point “sell” trigger level is derived from:
• 2011 year-end target for FBM KLCI or expected high
• Half way point between 2011 fair value of 1,605 and 2012 fair value of 1,466 points
• Slightly above the FBM KLCI level when we downgraded our call
Our 1,300-point “buy” trigger level is derived from:
• 13% upside to our 2012 FBM KLCI fair value of 1,466 points
• Equivalent to a PER of 12 times based on current earnings growth projections
Despite the wild swings in the FBM KLCI, we retain our “neutral” view on the market and maintain our top 10 defensive “buys”. This is because we are not positive on the fundamental outlook. Despite the potential resolution of the sovereign debt crisis in Europe, we continue to see the whole continent remaining in a difficult position between the flagging economic growth that should require stimulus and budget deficits that have required the cutting in spending.
As such, we feel that there is still a risk of recession in Europe. While the US is not in such bad shape, there still appears to be a lack of catalysts to truly spur growth going forward.
While some have called for a major selldown on the market, we are not that negative either. We see Malaysia still avoiding a recession with the Economic Transformation Programme, if it truly kicks off in a major manner in 2012 to help spur domestic growth through infrastructure spending. Also, Asia as a whole should be able to still avoid a recession. Finally, there is still room for the general election to provide some short-term trading opportunities.
Remain defensive and beware of profit taking
Looking at the performance of our top 10 defensive “buys” since Aug 6, six out of 10 have outperformed the FBM KLCI and we continue advocating them. For November, given that the markets have rallied so strongly in October and broke above our 2012 fair value, we advocate a cautious stance as profit taking might set in.
Top “buys” maintained
Our October “top buy” call was a washout. As we had expected the market to turn south in October, we had maintained our top 5 defensive buys during the month. Unfortunately all except AirAsia disappointed given the market’s rebound.
However, since we expect profit taking to set in for November, we are maintaining the same defensive stock list of Axiata Group Bhd, Petronas Gas Bhd, Telekom Malaysia Bhd, AirAsia and KPJ Healthcare Bhd. We expect these five companies to report relatively resilient earnings as well during the 3Q11 results reporting season.
This article appeared in The Edge Financial Daily, November 4, 2011.
