MALAYSIA is a strong candidate for rating upgrades, and 2003 could be a year when the country regains its A rating, said JP Morgan head of Asia sovereign research, David G. Fernandez.
We have reaffirmed our positive view on Malaysia,'' Fernandez told a media briefing yesterday. JP Morgan had aggressively called early last year for Malaysia's foreign currency ratings to be upgraded.
Investors took note of our call well ahead of the actual upgrades by S&P in August 2002 and Moody's in September 2002,'' he noted, adding that a combination of political stability and improving fundamental factors suggested that Malaysia was a strong candidate for ratings upgrades.
Currently, Malaysia is the only country in Asia that JP Morgan is overweight for fixed income investments. Last year, Malaysia scored a return of 16.9% among investment grade credits, coming in 2nd to South Africa (20%).
Among the benefits of ratings upgrades is that borrowing costs for Malaysia as a sovereign will be lower, said Tan Pye Sen, JP Morgan head of equity research (Malaysia). As revenue growth is not expected to be very strong yet, cost control will be an important element.
If the A rating can translate into lower borrowing costs, especially for large corporates, this will be positive for earnings upgrades,'' said Tan.
On the stock market outlook for 2003, Tan said the role to be played by the new asset management company, Valuecap, could be significant, especially in view of the healthy levels of local retail liquidity. Valuecap's aim is to invest RM10bil into the stock market over a period of time.
He observed that deposits held by individuals at local banks currently came up to 69% of the market capitalisation of component stocks of the KLSE CI.
The upside to the CI depends on whether foreign funds follow Valuecap's lead in 2003,'' he said, estimating that foreign funds weightings were now 60% to 70% of the MSCI index full weight.
He said stocks had become inexpensive relative to interest rates and historical price earnings multiples. Fundamental upside is based on earnings growth, which JP Morgan projects at 12% to 15% for 2003,'' Tan said.
Tan considers the current consensus of 20% for average earnings per share (EPS) growth to be rather high. When that comes down, we may see more sustained upside,'' he said.
JP Morgan estimated foreign portfolio outflows over the past three quarters since the 2002 market peak in April at RM3.4bil, equivalent to 75% of the RM4.6bil of inflows between third quarter 2001 and second quarter 2002.
Senior economist Rajeev Malik estimated the fiscal package to be announced end of February, at RM2bil to RM4bil, which is 0.5% to 1% of gross domestic product (GDP).
This is small compared with the last two packages,'' Rajeev said, adding that the situation was not as dire, and with Malaysia's revenue base and cautious spending, the country could afford fiscal boosts for the next two to three years.
He estimates GDP growth at 4% for 2002 and 5.2% for 2003 above market consensus (4.5% in December 2002) but below the government forecast (6%-6.5% in the 2002/03 Economic Report).
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