What does 2012 hold for equity markets?
After a volatile 2011 that saw financial markets tumble and investor sentiment rattled by the debt crisis in the US and eurozone, geopolitical upheavals and natural disasters, how will the local stock market fare in the New Year? MIDF Research’s acting head of equity Syed Muhammed Kifni shares insights with The Edge Financial Daily’s Surin Murugiah.
TEFD: What is your outlook for the Malaysian stock market and economy for 2012?
Syed Muhammed: External events and developments emanating from Europe, the US and also China will continue to influence the sway and direction of the local market. We expect the worst of the current weakness to manifest only during the first half of 2012, hence market volatility is anticipated to remain above normal during the next six months.
As for its 2012 trough, MIDF Research is of the view that the KLCI is likely to be supported at the 1,350 points level or 12.2 times CY2012 earnings as the local economy is expected to remain resilient, albeit restrained.
The market should start to gain sustained ground in the second half of 2012 as the euro debt issue begins to show credible signs of healing, ie the bleeding stops and vital
organs revive.
We reiterate our base-case KLCI year-end 2012 target at 1,530 points. The KLCI year-end target for next year is based on 14 times CY2012 earnings which reflects our view that the market shall by then be well on the road to recovery.
Our base case GDP growth for Malaysia in 2012 is 4.8%, from an estimated 5% in 2011.
Here, we acknowledge that Malaysia will be the second most affected within Asean, after Singapore, due to its openness.
In drawing out our 2012 economic outlook for Malaysia, we went back to the top-down approach, given that the Malaysian economy is vulnerable to global events in view of its highly open economy in nature, with its openness at 2.2 times, the second most vulnerable economy to global events after Singapore in Asean.
Nonetheless even if there is a double-dip recession in Europe, the GDP growth in Malaysia is expected to remain resilient, albeit restrained.
Weaker external demand shall be somewhat offset by robust domestic demand supported by accommodative monetary policies.
While exports to the developed economies may suffer, continued growth in intra-regional trade should provide a needed buffer.
Although fiscal positions are not as strong as prior to the 2008 crisis, we believe that Malaysia still has the capacity to roll out fiscal stimulus should it become necessary.
But finally, the game changing wildcard act of 2012 is none other than how well would the China authorities be piloting its “jumbo” economy to a safe landing. At least for now, the general consensus is siding with them.
What is your target for the KLCI for 2012?
FBM KLCI 2012 trough at 1,350 points, and year-end target of 1,530 points.
How do you think the euro debt crisis will play out, and what impact will it have on Malaysia?
The European Central Bank (ECB) chief is very unambiguous and methodological on how the euro-debt crisis should play out, in essence —
(i) stop the bleeding, and
(ii) revive the vital organ. He asserted that the first line of defence for the eurozone economies are austerity packages, structural reforms, solid public finances, and robust economic governance (ie stop the bleeding).
Secondly, the European leaders should deliver on the European Financial Stability Facility (EFSF) recapitalisation fund to ailing banks (ie revive the vital organs) rather than looking to the ECB as lender of last resort.
Nevertheless given the slow delivery on the EFSF recapitalisation fund (as the EFSF is not “joint and several” thus the cold market reception towards its bonds has hampered fundraising efforts) coupled with the ECB being dogmatic in its refusal to act as lender of last resort, the Europeans inactions may end up afflicting the entire global economy.
The US Fed is said to be very concerned about the prospect that the European debt crisis morphing into a contagion that could spread to the US and the rest of the world.
Hence, despite its reported refusals, we believe the US Fed may ultimately be compelled to spearhead the formation of a global recapitalisation fund (bulk of which will be rechanneled to the EFSF recapitalisation fund) to avert a global financial meltdown.
The IMF is a potential vehicle to front this supranational initiative, and we expect this scenario to pan itself out within the next six months.
Nonetheless, as stated earlier, even if there is a double-dip recession in Europe (from the debt crisis and austerity packages that follow), the GDP growth in Malaysia is expected to remain resilient, albeit restrained.
The years 2010/11 were seen as years of M&A activities, and the government’s economic transformation programme. What do you see as the domestic theme for 2012?
More headline-grabbing listings and M&A activities (eg Felda Global and Proton), as well as “walking the talk” as far as the ETP is concerned.
If general elections are held in 2012, as is widely expected, how do you expect themarket to react, pre-and-post elections?
To reduce the role of the government and make the private sector the engine of growth, fiscal consolidation has been one of the key policy agendas outlined in the New Economic Model.
However, if the general election were to be held in 2012, that could mean fiscal consolidation may not be as aggressive in order to support the economy and, by extension, this may also benefit the market.
Having said that, the market will continue be subjected to the various external as well as internal macro dynamics despite the positive election catalysts.
As attested by its pre-election 2008 performance, the KLCI actually dropped by nearly 130 points from the election announcement date in February to the day before the election was held in March due to the then burgeoning worries over the US subprime issue.
What sectors do you like for 2012?
Oil and gas, healthcare and telecommunications
What sectors would you avoid in 2012?
Automotive, shipping and property.
What are your top stock picks and why?
Market volatility is expected to remain elevated well into 2012, coupled with continued macro uncertainty, and further combined with healthy but slowing earnings growth.
This scenario leads us to favour investments with higher quality, secular growth, and sustainable and growing dividend yield. Below is a list of five stocks that fit our investment criteria.
We reckon all the five stocks are in good stead to outperform the broader market due their inherent quality together with their good growth potential.
Furthermore, their strong financial standings leave little doubt on their ability to maintain dividend payments even during period of economic slowdown.
YTL Power International Bhd (Buy, TP: RM2.50): YTL Power is known for its defensive earnings coupled with its strong cash pile of RM8.2 billion.
Although YTL Power is conserving cash for its future overseas expansion and M&A opportunities, it still has set aside sufficient funds to at least sustain its dividend payments.
We reiterate our “buy” recommendation with target price of RM2.50 based on sum-of-parts (SOP) valuation. YTL Power is expected to provide potential upside of 40.9% with expected dividend yield of 5% in FY12.
Wah Seong Bhd (Buy, TP: RM2.80): Wah Seong’s valuation of 11.4 times PER12 is undemanding (industry average of 18 times) considering the strength of its outstanding order book (RM1.2 billion as at September 2011) and replenishment rate (RM400m per quarter).
Gorgon LNG, Australia Pacific LNG and Kebabangan Deepwater projects are expected to sustain FY12F profit.
Wah Seong will also benefit from the booming Australia LNG sector as well as rising domestic gas field development. We have a “buy” call on Wah Seong with a target price of RM2.66. Total upside is 35.2% (including dividend yield of 3.5%).
Sime Darby Bhd (Buy, TP: RM11): We continue to like Sime Darby because we are expecting higher contribution from its plantation division as more trees coming into maturity, strong demand for mining equipment from China, increase in sales for its motor division supported by upcoming new models and higher contribution from property division as more property projects being launched.
We reiterate our “buy” call on Sime Darby at unchanged target price of RM11, giving a total upside of 25.6% inclusive of 3.4% expected dividend yield in FY12.
Malaysia Airports Holdings Bhd (Buy, TP: RM7.30): We believe that the main catalyst for Malaysia Airports (MAHB) in FY12 will be the new airport charges which received the government’s approval recently. Despite the rate hike, MAHB’s PSC and aircraft landing and parking charges are still comparatively lower than most airports globally and regionally.
We expect that non-IC 12 revenue forecast in FY12 will increase by 1.1% due to the increase in airport charges. Also, we expect that the airport charges will increase FY12 earnings forecast by 4.5%.
Also, as suggested by its strong traffic, we expect MAHB will be able to weather the short-term headwinds facing the aviation industry.
The completion of KLIA-2, with the additional 45 million capacity, and its overseas projects will provide a platform for future growth.
Hence, our “buy” recommendation for MAHB stock with a target price of RM7.30. This gives a total upside of 20.3% inclusive of 2.4% expected dividend yield in FY12.
Axiata Bhd (Buy, TP: RM5.85): We continue to like Axiata due to its growth potential and stable Ebitda despite operating in very competitive markets. We still consider Axiata to be a telecommunication company in a growth stage given that two of its four operating companies are in markets with low penetration rate.
While the 3Q11 results were below expectations, partly due to higher expenses, we believe that some of the increases in expenses were short term in nature.
We opine that the cost of network modernisation as necessary to position itself for the next growth phase, which is data.
We also view positively at XL’s early preparation to move into data as we believe that it will be well positioned to take advantage of the rising demand in data there.
We maintain our “buy” recommendation for the stock and target price of RM5.85, giving a total upside of 17.6% inclusive of 2.9% expected dividend yield in FY12.
Your wish list for the year?
My wishes are that the market recovers swiftly later during the year, and second, the Mayans miscalculated so the market may continue its ascent well into 2013.
