Business

Saturday March 21, 2009

Good upside potential for CI

By TEE LIN SAY


Umno elections and US pump priming add to upward bias.

REVIEW: With the upcoming Umno elections on March 25 and the ascension of Deputy Prime Minister Datuk Seri Najib Razak, the KL Composite Index (CI) is expected to have some action towards the 880 level in the weeks ahead.

Political tension is expected to rise with the rumour mill likely to be on overdrive.

Historically, the counters that generate most activity will be Umno-linked stocks. Even so, given the current global scenario, TA Securities technical analyst Stephen Soo says the market will continue to look for leads from the United States.

“If the United States stabilises, then yes, there is a higher chance of upside for the CI. For now, I feel the CI is swaying more towards an upside bias,” he says.

Over the week, the CI gained 16 points to 856 as the Dow Jones rallied 13% after weeks of plummeting.

The US Federal Reserve announced aggressive plans to pump more than US$1 trillion into the financial system by buying Treasury bonds and stepping up its purchases of other debt securities. The aim is to lower borrowing rates and stimulate lending.

While there was initial euphoria, investors had a change of heart as worries over inflation and the devaluation of the dollar kicked in.

Not surprisingly, commodities rallied. Light, sweet crude rose US$3.47, or 7%, to settle at US$51.61 a barrel on the New York Mercantile Exchange on Thursday.

Gold futures in New York rose as much as US$563.70, or 7.2%, to US$952.80 an ounce after the Fed said it would buy as much as US$300bil of US government bonds, adding to the supply of dollars.

CLSA Asia Pacific’s Christopher Wood says that so far, the rally in the United States has all the signs of being a classic bear market sort since it has been led by the financials.

He feels that the dollar will need to weaken more and the credit spreads to narrow further to convince us of its sustainability. He adds that the key issue remains whether American policymakers will address the banking system problem in a more convincing manner.

He adds that rising share prices clearly reduce the incentive to act proactively.

Outlook: Soo opines that the broader market will continue trading in rangebound fashion. With the present rally in commodities, he expects investors to re-look plantation stocks, particularly if crude palm oil prices stay at the RM1,900-RM2,000 level.

He also sees rotational play in lower liner stocks, although follow-through will be thin.

“There could be attempts to push the market up as the Umno elections proceed. Maybe volumes will start building up. But if it rises quite substantially, I am sure stale bulls will come in to spoil the party,” says Soo.

He sees the CI downside as limited for the time being.

CIMB Research technical analyst Nigel Foo says the CI is now on its rebound wave, with key resistance at the 864, or 38.2% Fibonacci retracement (FR), level.

“Once this rebound ends, the ‘Wave V’ down leg should kick in, possibly testing the recent 836 low or October 2008’s 801 low,” says Foo.

On a regional view, he expects Asian markets to pull back to the 50% to 61.8% FR once the present rebound ends. This should offer investors an opportunity to accumulate stocks.

HLG ebroking says the CI has been under-performing all key global market indicators and drifting merely 2.7% above its Oct 29, 2008 bottom.

“It notes that the CI is trading at 11.8 times price/earnings ratio, which is above all the key markets with the exception of Shanghai.

“This might be the reason for its relatively poor performance. Nevertheless, we expect the CI to rally towards the 880 level soon, after a one- to two-day correction,” it says.

Newsmakers

· As the March 31 deadline for a water tariff hike in Selangor looms, industry watches gather that Pengurusan Aset Air Bhd (PAAB) has met up with all Selangor water operators. For Puncak Niaga Bhd, the likeliest option will be that it accepts an offer from PAAB.

· Packet One Networks (M) Sdn Bhd, a subsidiary of Green Packet Bhd, has given a US$28.3mil (RM103.6mil) contract to China’s ZTE Corp to expand its high speed wireless network in the country. The contract will allow Packet One to penetrate areas which it has yet to enter in Peninsular Malaysia.

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