2010 Malaysian Equities Outlook

The latest quarterly corporate earnings reporting is showing continued to surprise on the upside over the last two quarters with companies reporting better margins and better product mix. Based on the current earnings projection, the KLCI is trading at 15.5x 2010 earnings and 2.1x price-to-book ratio. This represents 0.5x PER premium to the average PER over the last seven years from 2002 to 2008.

Hence, valuations are no means cheap, though not stretched. It is trading comparable to the Singapore and Hong Kong markets but it is still very much under owned market by foreign investors. Given high liquidity, low interest rates and a weaker US dollar environment, the possibility of overshooting on the upside for an extended period remains. To sustain this momentum, the government will have to continue to keep stimulus spending or not to prematurely tightening monetary policy, otherwise the economic and earnings recovery could turn out to be weaker-than-expected.

The downside of this scenario is the risk of build up in asst bubble. Commodity prices, equities and property prices have gone up significantly and we have seen some countries like Hong Kong, Singapore and South Korea to some extent have stepped up their efforts to prevent substantial inflows of hot money that could cause a huge swing in currencies and asset prices.

Volatility in our market is likely to increase and investors need to be prepared for portfolio rebalancing given the expectations of policy tightening and countries implementing ‘exit’ strategies in the course of this year. Market could take a craggy path from 2Q2010 on a host of external concerns, including upturn in the global interest rate cycle, easing fiscal stimulus especially in the US and rising threat of commodity inflation.

In terms of thematic plays, commodity space remains the favorite one on higher demand and prices. Plantation and oil & gas sectors will be again on investors’ radar screen. Feeding from commodity inflation, the next beneficiary from this will be property sector as asset prices on the uptrend.

Banking sector will remain another key play, but not because of economic recovery, but possibly to be driven by the wave of merger and acquisition among small and mid cap banking counters. Loan growth will be kept at around 7-9% this year and the key selling point of banking play will be improvement in asset quality as measured by drop in NPL and potential for more active capital management as several banks that have raised capital to prepare for a severe economic downturn may end up with excess capital. In 2009, the government had laid the groundwork for change – apart from further liberalization of the financial services sector, the FIC rules were also regulated and in June 2010, the government is expected to roll out the 10th Malaysia Plan and that could well be the make or break for the Malaysian market as a whole.