Saturday July 28, 2012
More volatile market seen for H2
By YVONNE TAN
THE local stock market appears to be set for more volatility in the second half of this year as the melange of weak overseas economic conditions and looming local polls continues to have a huge impact on investor and trader sentiment.
The 30-stock gauge of the local bourse, the FTSE Bursa Malaysia KLCI hit its all-time high of 1,635.96 on July 19, setting the pace for a healthy uptrend for the second half of the year.
However, it has since dropped to 1,625 points and expectations are that it could go lower amid the frothy global economic and political landscape.
A fall below the 1,620-point level, according to one technical analyst, would signal the end of the upward wave from the 1,526.60-point level recorded back on May 18.
“For now, it is quite clear that the market is in a critical condition and may slip into a coma anytime... Once comatose, we will have to wait until it wakes up again,” he quips.
Still, market experts are keeping their fingers crossed.
For one, from a fundamental point of view, they point out that another round of quantitative easing in the United States in order to stimulate slowing growth could possibly happen, enabling a healthy flow of funds into global markets including in Malaysia.
In fact, there is still plenty of liquidity sloshing around as a result of earlier stimulus packages by global central banks to pump up ailing economies. This has enabled foreigners to remain net buyers of Malaysian stocks for eight straight months up to May, according to latest data.
Granted, foreign money can leave a country as fast as it comes in, especially in a negative economic environment.
Global liquidity rush aside, locally, the usual suspects comprising feel-good factors, if not some uncertainty attached to the general election (GE) and the Economic Transformation Programme should continue to help hopeful investors find some solace.
The macro perspective
That said, challenges remain plentiful from the wider economic perspective.
For starters, recent US economic data comprising weaker retail sales and lower job growth are pointing towards a slowing economy.
According to latest data, retail sales in the world's largest economy, fell for the third consecutive month in June. Although a marginal 0.5%, the United States has not had three consecutive falls since the height of the financial crisis of 2008.
Latest figures also showed that companies created an average of just 75,000 jobs per month in the April to June quarter, which is reportedly a third of the monthly job growth in the quarter before it.
On top of these, the coming presidential elections as well as the fiscal cliff where a host of tax will be increased and automatic spending cuts kick in scheduled for the end of the year, are also threatening to post more uncertainties to the US economic growth trend.
Over in the world's second largest economy, China, indicators are also pointing to a softer growth trend, as evident by its central bank's action to cut benchmark lending rates for two consecutive months last month and this month after four years of holding the rates steady.
By lowering borrowing costs for consumers, the government hopes to stimulate spending and economic activity amid lower inflation.
In the case of the now infamous, prolonged European Union (EU) debt crisis, experts are saying that the countries are likely to go through a recession although major central banks are reportedly in a coordinated effort to boost liquidity in the ailing bloc.
“This will further complicate efforts to reduce the debt loads plaguing the governments,” Areca Capital chief executive officer Danny Wong points out.
“The short and long of it is will there be a resolution for the EU debt crisis will it end in a number of countries breaking away or will it all end happily ever after?
China grew by 7.6% in the second quarter, from 8.1% in the quarter earlier while the US economy expanded at a pace of 1.9% during the first quarter of this year.
“The main challenges for the second half of this year include a possible full blowout of the EU debt crisis due to political stalemate and/or social unrests on the back of high unemployment caused by austerity drives.
“Continuous weakness in major economies such as the United States, China and India may also post a major threat to emerging markets which are highly dependent on exports,” says Areca's Wong.
Locally, the GE outcome will be the focus of the investing community, he notes.
In such a market like this, Wong is choosing to go mainly defensive with a focus on high dividend-yielders.
“I expected a rally in the first half. I repeat my view that the local market may continue its mild uptrend, at least for the immediate term, but this time it faces more uncertainties as the market is pricier now compared to six months ago,” he says.
Trading at a price/earnings (PE) ratio of over 15 times, the local bourse is more expensive than most of its counterparts which trade at a PE of 12 to 13 times in general.
Wong says he is more inclined to pick stocks and sectors with clear catalysts and long-term sustainable competitive advantages, preferably less sensitive to changes in economies.
“I will place priority on dividend-yielders and defensive big-caps with exposure to index-linked counters.
These include stocks under the telco, healthcare, glove, consumer, gaming and plantation sectors,” he says.
That said, he notes that one should be holding “more cash” to capitalise on buying opportunities, post GE.
“Holding a portion of portfolio in fixed income securities such as investment grade bonds is also good strategy,” he adds.
Aberdeen's Ambrose, meanwhile, says his strategy in a market like this is “the same strategy as we have adopted for the past 26 years, namely trying to identify outstanding companies”.
“We find many of the constituents of our model portfolio are exposed to the domestic economy, which remains resilient.
Unlike most of the developed world, you can still get a job and a mortgage here and many have a little more to spend,” he says.
Ambrose points out that the local stock market is quite domestically-oriented and with inflation at only 1.7% last month, Bank Negara has room to slash interest rates to spur further growth.
“Not many of the big manufacturing exporters are listed which is another argument supporting the outperformance of Malaysia's market versus its neighbours.”
If before it was a laggard, the local market has outperformed its peers in recent weeks, amid much negativity in overseas markets.
Retail, banking, insurance remain healthy, if not exactly cheap, Ambrose notes.
“On the whole, the market's quite a way above its average PE ratio but not obscenely so.
“My waistline is above its moving average but that is not to say it will not further increase,” he says.
In a report to clients dated July 6, AmResearch Sdn Bhd head of research Benny Chew said the research house had shifted its sector calls with greater bias on cyclicals.
“In our opinion, the valuation re-rating of the defensive sectors consumer, select dividend-paying telcos and real estate investment trusts or REITs has run its course given lofty PEs,” he wrote.
Property is our contrarian overweight, he said owing to expectations of a strong return of pent-up demand given the normalisation of the impact of lending guidelines, continued urbanisation and several prolific projects.
He said AmResearch remained committed to its year-end fair value of 1,690 for the market based on an unchanged PE of 15.5x on current year's earnings, premised on steady earnings momentum by local firms, high amounts of domestic institutional monies as well as possible further monetary stimulus globally.
The fund manager says Fortress has been relatively defensive since the beginning of the year.
“Stock picks have been non-political stocks that are less sensitive to political headwinds.
“This year, we very much favour dividend yielding stocks that are supported by cash payouts and hence should be resistant to price sell-downs. With a cautious view on the external environment, this defensive strategy will continue into the second half,” Yong says.
He adds that the fund house's second half market outlook remains fairly robust but political headwinds will be at the forefront of investors' minds.
“Speculation on the GE will continue to drive market sentiment.
“If regional investors remain risk-adverse, the Malaysian market may very well continue to trade at healthy levels given its defensive nature historically, supported by dividend yields and domestic consumption.”