Year 2003 looks more promising. The stock market has been through a long period of consolidation since reaching its peak in April 2002. The anticipated Chinese New Year rally is also encouraging.
Continued price run-up for commodities such as gold,palm oil and crude oil could result in higher market levels.
Expectations that the general elections would be held in the second-half of the year could also fuel speculative interests.
The second-half of 2003 is likely to be dominated by the local political scene as preparations are made to make way for the eventual retirement of Prime Minister Datuk Seri Dr Mahathir Mohamad in October. Themarket is, therefore, likely to discount, positively or negatively, all possibilities such as a new prime minister, cabinet reshuffling, changes in economic and national policies as well as other political power plays.
The threat of terrorism,a possible US-Iraq war and a weakening US economy may be major dampeners to the domestic as well as globalmarkets. The health of the Japanese economy and China ’s strong growth must be watched closely.
Despite these inherent external risks,the broad CI valuations are quite low.At current levels,the mar ket is trading at a low 12-month forward price earnings ratio (PER)of12.6x. Valuation-wise, the market has fallen to an attractive level, even cheaper than that of Sept 11,as earnings growth has risen by between 18 per cent and 20 per cent this year alone.
The CI could easily recover to above 700 to reflect its fair value.
We are likely to maintain the equity weighting within the range of 60 per cent to 90 per cent throughout 2003.
We remain positive on the health of the domestic economy but take a more cautious stance globally, in the short-term.The short-term strategy should be more on trading-oriented stocks,taking opportunity of any thematic or political plays based on a three to six months ’ outlook.
Over the medium to long-term, we are positive on both the domestic and global economic environment. Our strategy is,therefore,to accumulate growth stocks.
Given the uncertainties,we prefer cyclical sectors.Construction remains a favourite.We also have an outperform on the plantation sector as the recovery of commodity priceswill drive the sector ’s earnings goingforward.We like banking stocks onrecovery play and gaming counters.
Estimates on gross domestic product (GDP)growth are coming in around 1 percentage point on either side of 5 per cent – we are confident of and comfortable with growth inthat ballpark. Pump priming in thepipeline coupled with high commodity prices should assure such growth.
The variance stems mostly from different opinions of what the global situation will be.Medium-term global economic prospects are improving by the day. The US Fed ’s overlyaccommodative monetary policies are likely to be fortified by another set of fiscal stimuli.
Keep in mind that we are now in the second-half of President Bush ’s term in office,hence the focus on short-term,feel-good policies to bump up re-election prospects. The son will not repeat the father ’s mistake of jobless recovery so policies enacted must filter down to the peo-ple – this will ensure the pillar of theUS economy, consumer spending, sustain its pivotal role. The second-half of 2003 looks increasingly promising.
It is also heartening to see the European Union Central Bank finally acknowledge that stimulating growth in that “commonwealth ” isnow a higher priority than capping inflation targets. The recent 50 basis point interest rate cut may be followed by another reduction, given the huge discrepancy between the European Union (EU)and the USrates, and the sudden strength of the Euro. Renewed vigour in the EU would help bolster global demand.
Meanwhile,Asia,excluding Japan,is showing ample resilience on the back of the rising economic might of China.
Another major encouragement is that telecommunications companies (telcos)globally are finally launching their 2.5 to 3G services. Garnering those licenses initially put the telcos in massive debt but the launch of these services has huge implications for all the peripheral semi-conductor, consumer electronics,and servicescompanies.
Since most of these companies have extreme operational gearing, a small rise in demand would lead to geometric bottom line recoveries.
Such prospects would have tremendous worldwide implications as most have manufacturing and consumption bases everywhere.
The recovery in the telco sector with the beginnings of a potential technology replacement cycle, and the spill over effects could signal the re-emergence of business spending, the missing link in the global recovery to date. However,this would not be immediate,as excess and outdated capacity would first need to be consumed.
As a fundamental long-term investor,we see value emerging at current levels. Price earnings (PE)are sitting at about 12 times 2003 earnings,inconsistent with an expandingeconomy with only moderate downside risks.But because sentiment is difficult to predict and may yet drive the markets lower,we are only cautiously accumulating stocks where values are too good to ignore.
To make room for these acquisitions, we are culling some holdings in our portfolio where upside prospects are less appealing.
In 2003,the CI would be fairly valued at around the 740 level,predicated on a modest external recovery scenario and continued depressed sentiment. However,again it must bestressed that sentiment is fickle andhard to pin point.
Should the “global uncertainties ” dissipate,the sentiment pendulum would swing back in the opposite direction and the market may then re-rate to the higher end of the PE spectrum nearer 20x PE,leading toexaggerated out performance on only slightly better than expected fundamentals. As such,a level of 900 plus on the CI is plausible onimproved sentiment – remember that markets always overshoot at troughs and peaks.
Malaysia is buffered in.But domestic demand,which is currently still strong,should taper off a bit in 2003– car sales being one example.
External developments such as the US ’ continuing economic decline would affect the whole region, but other regional markets still look better.
We don ’t project market levels, but I wouldn ’t be surprised if the CI ends next year higher. Nonetheless, we still think Malaysia will under-perform other markets. Growth shouldn ’t be far off from what ’s generally expected.
We don ’t disclose our weightings, but we are underweight on Malaysia relative to other regional markets.
Malaysia ’s valuations relative to history are undemanding, but other countries such as Korea and Thailand, look more attractive valuations-and price earnings-wise.
We don ’t disclose strategies, but we take a bottom up approach. We practise a value philosophy and focus on the long-term fundamentals and valuations of companies.
The market next year looks like it will be trading at about 14 times, compared to the stronger performing regions which are likely to be trading at less than 12 times.
Malaysian companies should average more than 2 per cent gross dividend yield, but Singaporean companies, for example, are expected to average more than 3 per cent, which is higher than a 10-year governmentbond.
Generally,banks are trading at a discount to the market at present.
We prefer casino operators to numbers forecasting operators, as they appear better managed. Visitor numbers have increased, as has room occupancy.There are also some interesting consumer companies – the recurring income types.
In the tech sector,there are tech stocks in Korea and Japan that look more attractive to us.Similarly, Malaysian telcos are going through a consolidation phase,but their valuations also look expensive relative toother telcos in the region.
In Singapore,we have two funds: the Asean Fund and a Far East ex-Japan Fund.Malaysian equities comprise about one quarter of our Asean Fund, but only 5.4 per cent of our FarEast ex-Japan Fund. Korea and Taiwan account for about 20 per cent each in the fund,Hong Kong 29 per cent,China 11.5 per cent,and other Asean countries,the balance.
Conservatively, I think the country ’s gross GDP growth for next year will be about 4 per cent to 4.5 per cent.
We were very bullish about the index early in 2002,but were wrong. Because last year was not such a great year,we would like to believe that this year should be better.
As a value investor,Pheim ’s strategy is to buy shares of companies with the potential to grow,and where the shares are cheap but management is proven to be good.
The environment is not so good at the moment,so we have to be very selective.
We buy when the shares are depressed and in companies that are very focused,those that have been a long time in the business for 20 to 30 years,but can survive.We also likethose in industries that have the potential to grow,or where it ’s cyclical and will come back.
We are looking for lowly geared companies. This is very important, so that in bad times the companies won ’t go bust.
Preferring to be conservative on the country ’s growth next year, we project a GDP expansion of 4 per cent to 4.5 per cent. Corporate earnings next year should average 11per cent to 12 per cent,but some companiescan do better than that, achievingcloser to 20 per cent.
Ultimately,it ’s the stock pick that is important, but one can do better ina better economy.
We like construction because many countries are pump-priming on deficit budgets; plantations due to rising crude palm oil prices and maturing acreages; timber; well-managed banks also can ’t be ignored;and technology which could be poised to ride an economic recovery.
We like Uchi Technologies Bhd as a niche stock,and WCT Engineering Bhd as we feel it is well managed.
We believe the market could potentially stage a technical rebound any time.First,the CI is trading at a low of 12.4x on FY2003 earnings has already breached the low end of the historical trading band. Over the last14 years (since 1988), the CI has traded within a band of 14x and 22x, and historically the market does notappear to have stayed at levels below14x for long.
Fundamentally, we believe the recent sell down on equities by some foreign portfolio managers was totally unjustified as GDP growth for Malaysia has been strong as evidenced by the 5.6 per cent third quarter GDP growth announced recently.
Moreover,Malaysia is on track to register another strong 5.0 per cent growth at least for the fourth quarter 2002 and is projected to surge even stronger to 6.0 per cent for the whole of 2003.
As the stock market is closely correlated with GDP growth, we can expect a stronger market performance next year. As there are noadverse macro-developments, we can conclude that the recent sell down was purely driven by weak market sentiment and unjustifiedaction by some foreign portfolio managers to lower their weightings on Malaysia.
In terms of market valuations, the US is looking more reasonable (with the exception of Nasdaq Composite Index) following the sharp correction this year. As for the Malaysian market,valuations are also looking more attractive against its regional peersfollowing the recent sell down. Webelieve FY03 earnings forecast of 13.6per cent may potentially see some upside on the back of the strong economy next year.
Our strategy is to gradually increase our equity weightings on market weakness.At this juncture, we would “bargain hunt ”,focusing on value and growth stocks.
Banking and gaming stocks are looking more attractive following the recent correction while selective blue chips like Perusahaan Otomobil Nasional Bhd,Arab Malaysia FinanceBhd, IJM Corporation Bhd and Berjaya Sports Toto Bhd are also compelling.
The first-half of 2003 is likely to be tough.All the present uncertainties, like possible war against Iraq and a global economic slowdown, are expected to carry into 2003. If the war with Iraq turns out to be a short one,then the market can look to arecovery in the second-half.
Otherwise,we ’ll have to brace ourselves for a depressing 2003.
Factors investors should look out for,which are likely to have an impact on the way the market performs,include the possibility of war with Iraq,corporate earnings and theeconomy, power transition in Malaysia, the flow of foreign funds and general elections.
Based on our current forecast, the market is actually trading cheaply. But a re-rating can only materialise once the outlook getsclearer.
Stay cautious.Prepare for the worst in the first-half.Look to bargain-hunt on companies that are resistant to economic cycles.
Generally,2003 should be a better year than 2001 and 2002. There are a few uncertainties that have kept equity markets down so far;war risk, geo-political risks and the health of the US economy. With regard to thewar risk, this should resolve itself oneway or the other within the next 12 months.
As for geo-political risks, people have pretty much come to accept the fact that this is something that they ’ll just have to live with.
That leaves us with the health of the US economy.Here,we should get more data that will determine which way the economy is headed. As it is, the data coming out of the US is turning out to be more on the neutralside, thus leading more people to think that next year won ’t be a disastrous one for the US economy. This should remove some uncertainty in the market.
Our projection for the CI next yearis 857 points.We feel this realistic aswe are expecting to see some prettydecent corporate earnings next year.
Consensus puts corporate earnings 20 per cent for 2003.
As things stand now, cautious investors would be better off sitting out the months of January and February as all eyes are now looking to a war against Iraq breaking outsometime in February. After February, a clearer picture should arise,thus making it safer for investors to venture into equities.
Gaming,banking,plantation and construction
We are positive about next year. Should the global scene maintain stability without major dampeners, Malaysia can register a GDP growth of 6 per cent next year.
But if the US economic slowdown drags on and Japan ’s domestic demand stagnates,then Malaysia could well be affected,its GDP potential narrowed to 4 per cent to 5percent.
The first-half will be key here, asthere is still a lot of downside globally.
A number of factors should be closely watched for the year ahead.
They include US-Iraq tensions which could impact on oil prices and bring about an oil shock inflation should oil prices rise too quickly. The possibility of Bank Negara slashing the intervention rate by 50 basis points in the event that domestic demand andexports not perform as expected or hoped. But this could result in a liquidity trap.
Other factors are speculations for a general election next year,which in turn could lead to market volatility.
Similarly,there are expectations for post-Mahathir uncertainties.
But as the economy improves and valuations improve vis-à-vis some of the other regional markets, I expect a gradual reversal of portfolio funds to the Kuala Lumpur Stock Exchange (KLSE).
I would keep 30 per cent in cash, and the balance in bonds and equities. But with bonds,if global rates increase,yields will be flattish. I would then start liquidating fixed-income and increase equities. I wouldlook at bonds of A3 and above, and maybe even those of triple B for better returns,depending on the risk-reward returns.
I favour fundamental stocks, those that are more domestic-driven, in consumer and construction. Also semiconductor and retail banks to some extent as non-performing loansshould be more stable now. I would also have some big-and small-cap stocks for speculative purposes.
Based on our in-house GDP growth forecast of 5 per cent for 2003, we expect the KLSE to perform well next year as the market is relatively trading at attractive PER valuation of just 12.6x 2003 earnings. This, by comparison, is at the lower end of themarket ’s PER trading band of about12-20x over the past two years. Thus,value buys and position themselvesfore recovery in 2003.
Based on current earnings outlook,we have a fair value of 845 points onthe CI for 2003. This would mean thatthe market would then trade at 17xearnings,which is quite achievable.
For example,when the CI surpassed the 800 points level in 2002,the market was then already trading close to 19x 2002 earnings.
The first-half of 2003 would be exciting times, as the market tends to remain buoyant during this period, especially during the first quarter.
Our advice to investors is to accumulate quality blue chips now and ride the wave of the expected recovery in 2003.
The second-half of 2003 would be a tricky call at this stage. Of course most of us have imputed a gradual recovery in economic activity but the key here would really be how would the US perform over the next twoquarters.
Investors are also expected to play close attention to the changing political climate in the country when the prime minister steps down in October. Furthermore, there arealso strong indications that the rulingparty, Barisan Nasional, may call foran early election,perhaps in the firstquarter of 2003.
Top pick -plantation sector is stillundervalued despite the current buoyant crude palm oil prices. We prefer exposure to small second-tier stocks,namely PPB Oil Palms Bhd and Kulim (M)Bhd.
Continue to favour the gaming sector with Resorts World Berhad, Genting Bhd,Berjaya Sports Toto Bhd and Tanjong Public Limited Company as clear winners.
In the power sector, we believe that Malakoff Bhd and YTL Power International Bhd will continue to outshine while construction stocks such as Gamuda Bhd,Road Builder(M)Holdings Bhd and IJM Corp Bhdshould be in investors ’ shopping list.
In the telecommunications sector, our top pick is Maxis Communications Bhd while amongthe consumer stocks; we favour British American Tobacco (M)Bhd and Jaya Jusco Stores Bhd.
Timber stocks look attractive, as the market seems to have neglected the sector despite steady prices. Our pick in the sector includes Ta Ann Holdings Bhd and LinguiDevelopments Bhd.
Among the motor stocks,we tend to favour Proton Otomobil Nasional Bhd, MBM Resources Bhd as well as Edaran Otomobil Nasional Bhd.
Autopart manufacturers too are in our “Buy ” list and this includes stocks like NEW HOONG FATT HOLDINGS BHD, Ingress Corp Bhd and BSAInternational Bhd. Among the banking stocks, we would prefer an exposure to Public Bank Bhd, AMMB Holdings Bhd and Commerce AssetHolding Bhd.
Did you find this article insightful?