How high can it go?

  • Business
  • Saturday, 04 Jan 2003


ASK around.It is a foregone conclusion that the local stock market is currently not too far off its lowest ebb. The mostpertinent question is how high can the Kuala Lumpur Composite Index (CI)go in 2003? 

And as many beckon towards the traditional signposts of the country's economic direction to predict the unpredictable ways of the market,no one seems bold enough tocome up with a clear enough projection. 

“It's safe to say the market is not too far off its downside. But where are the catalysts for it to go higherand how high can it go?” questionsa market observer. For much of 2003,broken-hearted investors only too glad to bid 2002 goodbye will be scrounging for the answer tothat. 

At the close of every year,most look towards market pundits for their projections on how the market will fare for the New Year. Intruth,nobody will ever really know what spurs the daily grind of market ups and downs today,let alone the future. 

And as gathering ideas from a school of experts is the closest one can get to guessing the market's temperament for year ahead, BizWeek has contacted analysts (on the sell side)as well as fund managers (on the buy side)to give us their take on the market for year 2003. 

While they don ’t quite fit the bill as market cheer leaders,most of them have interestingly this time made range projections based on worse and best case scenarios,reflecting the uncertain times. Thelowest CI target is 550 while the highest stands at 900,which from the CI's last trade of the year of 646.30 confirms general market sentiment that there is more room for upside than the downside for 2003. 

One thing is clear though – the “bulls ” who believe the market will go up outnumber the “bears ” who believe that stocks will fall.. 

Further indication of this is the results of CIMB Securities'recent first quarterly survey of 24 fund managers with funds ranging from RM100 million to excess of RM3 billion. The fund managers polled are of the view that it is almost three times more likely that the year ahead will be better instead of worse. 

And the biggest stumbling block to any rally in the market for the year ahead – concerns of the US economy (the numbers are leastencouraging)and their impact on the domestic economy and the US-Iraq conflict. 

On the latter,one fund manager aptly puts it:“For all the expert opinion, the possibilities are limitless and the outcome truly unpredictable ”. 

Since the US-Iraq war rhetoric,the CI has underperformed all regional markets and has continued to underperform the recovery inthe US market – a price ,some say,it had to pay for having outperformed other markets in the first half of 2002. 

Reassuring somewhat is the fact that in the event the war breaks out,the local market may not pull back as significantly as the rest of the markets,given that it has not gained much ground. 

Also,how smooth the political transition from Prime Minister Datuk Seri Dr Mahathir Mohamad's regime will definitely have animpact on the market but that is likely to show up only in the later part of the year.As CIMB puts it nicely:“The biggest concerns for equities in 2003 could also provide the biggest upside.” 

They include economic recovery (particularly in the US),improvement in corporate earnings (given the consensus earnings growthestimates of around 15 per cent in 2003,any surprise would have to come in at 20 per cent or more of earnings growth),liquidity factor (there is ample excess of liquidity estimated at RM62 billion as at end Nov,2002 which one way or another flows into equities), rally in regional equities and a peaceful solution to US-Iraq conflict. 

As far as the CI projections go,CIMB's respondents'highest and lowest predictions reveal that there is a 29 per cent upside to the CI's expected peak in 2003 against only a 4 per cent downside. 

Promising enough? 


■■TA Unit Trust ManagementBhd chief executive officerRichard Chua■■Unit trust fund size -RM180million■■Kuala Lumpur CompositeIndex (CI)projection – 760OutlookYear 2003 looks more promising.The stock market has been througha long period of consolidation sincereaching its peak in April 2002.Theanticipated Chinese New Year rallyis also encouraging.Continued price run-up for com-modities such as gold,palm oil andcrude oil could result in higher mar-ket levels.Expectations that the general elec-tions would be held in the second-half of the year could also fuel specu-lative interests.The second-half of 2003 is likely tobe dominated by the local politicalscene as preparations are made tomake way for the eventual retire-ment of Prime Minister Datuk Seri DrMahathir Mohamad in October.Themarket is,therefore,likely to dis-count,positively or negatively,allpossibilities such as a new primeminister,cabinet reshuffling,changesin economic and national policies aswell as other political power plays.The threat of terrorism,a possibleUS-Iraq war and a weakening USeconomy may be major dampenersto the domestic as well as globalmarkets.The health of the Japaneseeconomy and China ’s strong growthmust be watched closely.Despite these inherent externalrisks,the broad CI valuations arequite low.At current levels,the mar-ket is trading at a low 12-month for-ward price earnings ratio (PER)of12.6x.Valuation-wise,the markethas fallen to an attractive level,evencheaper than that of Sept 11,as earn-ings growth has risen by between 18per cent and 20 per cent this yearalone.The CI could easily recover toabove 700 to reflect its fair value.StrategyWe are likely to maintain theequity weighting within the rangeof 60 per cent to 90 per centthroughout 2003.We remain positive on the healthof the domestic economy but take amore cautious stance globally,in theshort-term.The short-term strategyshould be more on trading-orientedstocks,taking opportunity of any the-matic or political plays based on athree to six months ’ outlook..Over the medium to long-term,weare positive on both the domesticand global economic environment.Our strategy is,therefore,to accumu-late growth stocks.Stock/sector picksGiven the uncertainties,we prefercyclical sectors.Constructionremains a favourite.We also have anoutperform on the plantation sectoras the recovery of commodity priceswill drive the sector ’s earnings goingforward.We like banking stocks onrecovery play and gaming counters.Picks:Berjaya Sports Toto Bhd,Genting Bhd,OYL Industries Bhd andMaxis Communications Bhd.■■Michael Auyeung,chief execu-tive officer (CEO),Pacific MutualFund Bhd■■Unit trust fund size:RM968million■■CI projection – 900 points is“plausible ”OutlookEstimates on gross domestic prod-uct (GDP)growth are coming inaround 1 percentage point on eitherside of 5 per cent – we are confidentof and comfortable with growth inthat ballpark.Pump priming in thepipeline coupled with high commod-ity prices should assure such growth.The variance stems mostly from dif-ferent opinions of what the globalsituation will be.Medium-term glob-al economic prospects are improvingby the day.The US Fed ’s overlyaccommodative monetary policiesare likely to be fortified by anotherset of fiscal stimuli.Keep in mind that we are now inthe second-half of President Bush ’sterm in office,hence the focus onshort-term,feel-good policies tobump up re-election prospects.Theson will not repeat the father ’s mis-take of jobless recovery so policiesenacted 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 increasinglypromising.It is also heartening to see theEuropean Union Central Bank finallyacknowledge that stimulatinggrowth in that “commonwealth ” isnow a higher priority than cappinginflation targets.The recent 50 basispoint interest rate cut may be fol-lowed by another reduction,giventhe huge discrepancy between theEuropean Union (EU)and the USrates,and the sudden strength of theEuro.Renewed vigour in the EUwould help bolster global demand.Meanwhile,Asia,excluding Japan,isshowing ample resilience on the backof the rising economic might ofChina.Another major encouragement isthat telecommunications companies(telcos)globally are finally launchingtheir 2.5 to 3G services.Garneringthose licenses initially put the telcosin massive debt but the launch ofthese services has huge implicationsfor all the peripheral semi-conductor,consumer electronics,and servicescompanies.Since most of these companieshave extreme operational gearing,asmall rise in demand would lead togeometric bottom line recoveries.Such prospects would have tremen-dous worldwide implications as mosthave manufacturing and consump-tion bases everywhere.The recovery in the telco sectorwith the beginnings of a potentialtechnology replacement cycle,andthe spill over effects could signal there-emergence of business spending,the missing link in the global recov-ery to date.However,this would notbe immediate,as excess and outdat-ed capacity would first need to beconsumed.StrategyAs a fundamental long-terminvestor,we see value emerging atcurrent levels.Price earnings (PE)aresitting at about 12 times 2003 earn-ings,inconsistent with an expandingeconomy with only moderate down-side risks.But because sentiment isdifficult to predict and may yet drivethe markets lower,we are only cau-tiously accumulating stocks wherevalues are too good to ignore.Tomake room for these acquisitions,weare culling some holdings in ourportfolio where upside prospects areless appealing.In 2003,the CI would be fairly val-ued at around the 740 level,predicat-ed on a modest external recoveryscenario and continued depressedsentiment.However,again it must bestressed that sentiment is fickle andhard to pin point.Should the “global uncertainties ”dissipate,the sentiment pendulumwould swing back in the oppositedirection and the market may thenre-rate to the higher end of the PEspectrum nearer 20x PE,leading toexaggerated out performance ononly slightly better than expectedfundamentals.As such,a level of 900plus on the CI is plausible onimproved sentiment – rememberthat markets always overshoot attroughs and peaks.■■Prudential Portfolio Managers– portfolio manager Chow WengKin■■The fund oversees US$11.7 bil-lion in Hong Kong and SingaporecombinedOutlookMalaysia is buffered in.But domes-tic demand,which is currently stillstrong,should taper off a bit in 2003– car sales being one example..External developments such as theUS ’ continuing economic declinewould affect the whole region,butother regional markets still look bet-ter.We don ’t project market levels,but I wouldn ’t be surprised if the CIends next year higher.Nonetheless,we still think Malaysia will under-perform other markets.Growthshouldn ’t be far off from what ’s gen-erally expected.StrategyWe don ’t disclose our weightings,but we are underweight on Malaysiarelative to other regional markets.Malaysia ’s valuations relative to his-tory are undemanding,but othercountries such as Korea and Thailand,look more attractive valuations-andprice earnings-wise.We don ’t disclose strategies,butwe take a bottom up approach.Wepractise a value philosophy and focuson the long-term fundamentals andvaluations of companies.The market next year looks like itwill be trading at about 14 times,compared to the stronger performingregions which are likely to be tradingat less than 12 times.Malaysian companies should aver-age more than 2 per cent gross divi-dend yield,but Singaporean compa-nies,for example,are expected toaverage more than 3 per cent,whichis higher than a 10-year governmentbond.Sector pickGenerally,banks are trading at adiscount to the market at present.We prefer casino operators to num-bers forecasting operators,as theyappear better managed.Visitor num-bers have increased,as has roomoccupancy.There are also someinteresting consumer companies –the recurring income types.In the tech sector,there are techstocks in Korea and Japan that lookmore attractive to us.Similarly,Malaysian telcos are going through aconsolidation phase,but their valua-tions also look expensive relative toother telcos in the region.■■Pheim Asset Management CEODr Tan Chong Koay■■Fund size – RM1.5 billion ((inMalaysia and Singapore).nEquities account for about 65 percent of fund ’s weighting inMalaysia.OutlookIn Singapore,we have two funds:the Asean Fund and a Far East ex-Japan Fund.Malaysian equities com-prise about one quarter of our AseanFund,but only 5.4 per cent of our FarEast ex-Japan Fund.Korea andTaiwan account for about 20 per centeach in the fund,Hong Kong 29 percent,China 11.5 per cent,and otherAsean countries,the balance.Conservatively,I think the coun-try ’s gross GDP growth for next yearwill be about 4 per cent to 4.5 percent.We were very bullish about theindex early in 2002,but were wrong.Because last year was not such a The second-half of 2003 is likely to be dominated by the local political scene as preparations are made to make wayfor the eventual retirement of Prime Minister Datuk Seri Dr Mahathir Mohamad in OctoberRichard ChuaMichael AuyeungChow Weng KinTan Chong KoayStories by PAULINE S.C.NG,DARSHINI NATHAN and TEE LIN SAY■TURN TO PAGE Interesting to note thatonly one out of theconcerns here relate toMalaysia-specific issues.It landed in number 4spot as political transitionThe biggest concernfor equities in 2003could also provide thebiggest upsideFund managers thinkthat it is almost threetimes more likely that2003 will be betterinstead of worseHow highcan it go?

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