After advancing for a solid one-and-a-half quarters, the question now is what is in store for the KLSE in the fourth quarter
During the run-up, investors had been mesmerised by a spectacular rally in the oil and gas stocks, nibbled away quietly at water stocks and also scrambled for counters listed on the Mesdaq market.
Star counters such as SCOMI GROUP BHD and Crest Petroleum Bhd are now on the lips of many retailers, who will undeniably be wondering whether the theme plays that marked the third quarter would return in the next quarter.
But will such bullishness be sustained during the last quarter of a year that has seen a war and a major health scare? Will oil prices still remain firm and what effect will a weaker US dollar have on the stockmarket?
Fund managers and analysts polled by StarBiz (Jagdev Singh Sidhu, Sidek Kamiso, Daljit Dhesi and Kathy Fong) generally felt the CI would go up.
Apart from acknowledging that better economies globally would help companies and boost sentiment, they also see rosy prospects for the market although there could be some short-term indigestion.
They also made their favourite stock picks, which are not limited to just the high-flyers.
Pankaj Kumar, OSK Research Assistant General Manager, research
Outlook for Q4
We believe our market is fundamentally attractive and expect the KLCI to continue its fine run. Historically speaking and on average, 4Q has provided the best returns to investors with gains of about 10% over the past 14 years.
On a straight PER basis, investors are likely to look at the market’s PER for 2004 and on that count, the KLCI is indeed undemanding in valuation, trading at just 13.5x multiple. The market’s run over the past few months has been aided mostly by local money with little inflow from the overseas front.
With other South-East Asian markets continuing to do well, we believe some of these flows will start to trickle into Malaysia in 4Q. We are projecting a year-end close for the KLCI at 810 pts.
What are your favourite stocks
Our top five picks at the moment are stocks like MISC, Genting, Malakoff, Commerce Asset and OYL.
For MISC, we believe that with the increase in freight rates as well as the acquisition of American Eagle Tankers, the national liner’s earnings are set to soar.
Genting's fundamentals remain attractive as SARS fears have subsided and with the increase in room capacity as well as potential new power generating assets.
In power, we like Malakoff particularly as the acquisition of 90% stake in SKS Power, although detrimental to its earnings now, will enhance the company’s cashflow as well as valuations. In banking, our top pick is Commerce Asset as the group’s investment bank as well as PT Bank Niaga has performed surprisingly well.
We also believe that Commerce will remain relevant in the second round of mergers. OYLis indeed a good proxy to the China theme play. We believe that being one of the best-run companies in Malaysia, OYL will continue to reward shareholders handsomely.
What developments are you expecting to take place during the fourth quarter
The first on the list is the change of guard at the country’s number one post. The market will be closely watching the appointment of a new DPM as well as Finance Minister.
We also believe that the time is ripe for a general election, which we reckon could give PM-elect Datuk Seri Abdullah Ahmad Badawi a fresh mandate.
Is it risky to enter the market now
While there are always risks when investing we believe that at current levels, the downside risk is rather limited.
Furthermore, with ample liquidity in the banking sector coupled with returns of less than 4% on risk-free investment like fixed deposits, the market’s current earnings yield of about 7.4% for 2004 is compelling. Our advice to clients is simple.
Stick to the fundamentals and on occasions trading strategy can be adopted to cash in on selected market moving news and momentum.
LUCY NG Executive director KAF Research
We can be optimistic of Q4 and beyond. The economy is growing (expected 4.5% this year and 5.5%-6% next year), interest rates are at historical lows, liquidity is ample and the prices of many stocks are still cheap or reasonable.
Best of all, confidence in the stockmarket is rising, propelled by rising prices in the past few months. This level of confidence should be sustained or increased as investors look forward to the General Election, which must be held by November 2004.
Given Malaysia’s state of economic growth and corporate earnings momentum, we believe the KLSE to be fairly valued at 16x earnings. This pegs the benchmark CI at 780 for 2003 and 870 for 2004.
In 4Q03, Construction related stocks and those perceived to have strong political connections will feature more strongly as General Election themes will be played out. The Government is expected to announce more contracts and as such, we expect MTD Capital may at last get confirmation of the award of ECE 2 (East Coast Expressway 2). The stock is also undervalued, as revised net asset value is estimated at RM8.30/share.
Recently listed Salcon is a construction as well as water play. Track record is impressive, as it has completed more than 450 water and 250 wastewater projects.
We also recommend B.Toto as a proxy to economic growth. Valuations are reasonable with the share (RM4.08) trading on 13.6 times financial year to April 2004's fully-diluted earnings.
Naim Cendera will be a beneficiary of development in Sarawak. Naim is a well-connected property developer and one of the largest developers in Sarawak. It also has a construction arm with an order book of RM508mil. The group plans to bid for RM2bil worth of contracts and recently signed a joint venture agreement with PPES (Sarawak) to submit a proposal to design and construct a major state project in Sarawak.
BSA is a world player in the aluminium alloy wheels market. Price earnings multiple is in single digit while earnings per share growth is in double digits.
Richard Chua TA Unit Trust Management Bhd. CEO
Stockmarket outlook for Q4 and CI's year-end target
The outlook for the KLSE in the 4th quarter this year is bright. The US economy is expected to grow 4%-5% in the third quarter following a robust 3.1% in the second quarter. Domestically, Malaysia has been a solid economic restructuring story over the past few years.
Risk appetite has been low, partly due to a relatively under performing stock market.
Having said that, the corporate sector continued to de-leverage and strong rebounds in corporate earnings could lift the overall sentiment. The emergence of a recovery play, driven by situational stocks, could engender a stronger performance in the last three months of the year.
Year–end target expectation is actually quite meaningless. Moreover, the CI only reflects 100 stocks and not the market in general. As such, we may see certain stocks and sectors outperforming the CI.
What matters is that with strong economic fundamentals, 2004 will be a good year.
All the stocks we have are our favourite stocks. To choose five will be difficult. OYL Ind, Uchi Tech, Transmile, Gamuda, Puncak Niaga, Ranhill and some IT stocks should be among them. We go for companies with sound fundamentals, strong management, and those with good profit records and strong earnings potential.
Developments anticipated for Q4
Global economic developments over the next few months, especially in the US and Japan (two biggest economies), will be closely watched. Oil prices and currency volatility are issues that will feature prominently over the next few months or longer.
The weakness in US dollar will see a flow of money out of dollar-based assets into Asian currency-based assets.
Domestically the leadership transition will take centre stage, the new team (new DPM) and so on. The listing of Astro, will also create some excitement in the market. Talk of election should reach its dizzy heights in the last quarter as well.
Thomas Yong Chief executive officer Fortress Capital Asset Management
Stockmarket outlook for Q4
Our outlook for the 4th quarter is neutral to positive. We are looking for indications in external trade and corporate investment growth to provide positive leads to the economy towards the end of the quarter. Domestic themes will continue to maintain investors' interest as the government refocuses on the domestic economy in the face of a slower-than-expected rebound in exports year-to-date.
Retail investors appear to be somewhat euphoric; looking at the take-up rate of small stocks. Judging by the recent gains in equity prices against comparative valuations, we are inclined towards a mild correction before the second phase of the stock rally could take place in the later part of the fourth quarter.
Five favourite stocks and why
MPI – external positives i.e. semiconductor recovery 12.5% YOY sales dollar. Pharmaniaga and Dialog – rotational / thematic plays. 10 times price earnings ratio. Gamuda – water-related contracts, and strong domestic construction and infrastructure earnings base. MK Land – well located residential properties, namely Damansara Perdana near Tesco and Ikea.
Developments anticipated for Q4
We will continue to monitor the export cycle, particularly the strength of the seasonal pick-up in the semiconductor industry that would provide a backdrop to export performance for Malaysia. Corporate loans growth in the 4th quarter would provide an indication to responses from the private sector to the recent budget measures for revitalising the corporate investment cycle. Corporate fundamentals in earnings growth will need to be revisited before the rally could proceed further.
NGU CHIE KIEN Head of Research TA Research
Outlook for Q4
The market will be focusing on the power transition that will take place after Oct 31, where Datuk Abdullah Ahmad Badawi will take the reins from Prime Minister Datuk Seri Dr Mahathir Mohamad. We expect a smooth power transition and it should be good for the stock market.
Although a smooth power transition is widely expected, we believe the event is still significant as it eases political uncertainties that will otherwise hurt the market.
Abdullah could further soothe the market if he appoints a new Deputy Prime Minister who is widely accepted by the party. This could be the first test of his political mastery as a new PM.
Important development to watch
Astro All Asia Network plc will be listed on the KLSE on Oct 28. The success of Astro's listing, which is billed as the largest for Malaysia this year, will be seen as a litmus test of the Malaysian market ahead of the power transition.
Too late to enter the market?
Definitely not. There is more upside to the Malaysian market. The economy is recovering well and we expect the momentum to pick up in 2004, led by a combination of domestic and external factors.
Valuation wise, the market is still cheap with PER of 13.5x for 2004. With stronger corporate earnings and brighter economic outlook, it is quite easy to achieve a return that is double that of fixed deposit rates.
Top 5 stocks
Commerce Asset-Holding Bhd: It has under-performed the banking sector but I think its business has grown in strength, especially with its merchant bankers associate, CIMB Bhd, which had dominated most of the major deals including the most recent initial public offering of Astro All Asia Network plc.
Ranhill Bhd: Apart from the fact that the company will lead the second oil exploration consortium, the company also has strong earnings from its main core business – engineering and construction. We believe the current valuation at about 15 times its earnings is justified in view of its long-term growth expected from the oil and gas sector. In addition, its units, Ranhill Utilities Bhd's presence in the water sector will boost its rating further.
Supermax Bhd: The company is one of the local glove makers which have made a huge presence overseas in terms of branding. About 70% of its products carry their own brand, thus yielding higher margins. Also, it is expected to benefit from the recent government's fund targeted at promoting Malaysian brands overseas.
Malaysia Pacific Industries Bhd: This sector is the forerunner in the local technology sector. We believe MPI will benefit from the recovery in the global technology sector as well as improvement in the global economy.
KNM Group Bhd: While the group draws some 48% of its earnings from oil and gas sector overseas, it also has a strong presence locally. It is also competitively valued given the current run-up in the oil and gas sector.
Gan Kim Khoon Executive Director / Head of Research AmResearch Sdn Bhd
We remain positive on the stock market. We expect the stock market’s short-term direction to be driven higher by events such as the leadership transition in early November, the general election, which we think will be held in early December, and large initial public offerings such as those by Astro (in late October) and Felda.
We also expect a re-acceleration in corporate merger and acquisition (M&A) activities, with companies and investment bankers alike seeking to capitalise on the improved sentiment in the stock market.
In any case, the market’s relatively low price-to-earnings valuations (13.7x for 2004) and the KLSE’s relative under-performance year-to-date (vis-à-vis the other markets in the region) warrant further upside for the KLSE Composite Index (CI).
Given these events and market fundamentals, we would not be surprised if the CI soars to 780-800 points by the end of October or early November.
What are your favourite stocks
Broadly speaking, we like medium-capitalised stocks with single-digit price-to-earnings ratios and strong three-year earnings compound annual growth rates. But if you don’t mind, I prefer to keep our stock recommendations for our clients.
What developments are you expecting to take place during the fourth quarter
The key events that will keep investors’ attention riveted are the leadership transition and the possibility of a general election.
Is it risky to enter the market now?
The CI has been consolidating between 730 and 750 points for the last one-and-a-half months (since mid-August). With everything going for the KL market, and with interest rates remaining so low and liquidity still so flush (the latter two factors would provide support to any market downturn), now is a good time as any for investors to enter the market.
Valuations are still undemanding, earnings growth was recently raised with the recent better-than-expected second-quarter results, and the domestic economy is heading for stronger growth in 2004. We think the upside risk (the risk of missing the market’s upturn) is higher than the downside risk.
Sazali Zainal Abidin CEO MAA Mutual Bhd
Outlook for Q4
Investors can rest assure that there will be no interest rate hike in the immediate term, almost definitely until the end of the year, and this is good not only for stocks on the KLSE but also for the bond market.
he outlook of the KLSE in the fourth quarter of this year is good, but it will be much better if the only factor that may still be lacking for the KLSE to begin its rally will materialise, which is the much needed “push” from foreign institutional investors, hopefully from the Middle East.
Year-end target for the CI
I maintain my forecast at above 800 points at the end of year. Should the CI reach the 800-point mark, the market still has room of close to 8% growth until the end of the year.
Important developments to look out for in the fourth quarter
It would be interesting to note the growth and development that Mokhtar Al-Bukhary will bring to Bank Muamalat Bhd, following the proposed acquisition of a 70% stake in the bank by Bukhary Capital Sdn Bhd.
The listing of Astro, the pure monopoly pay TV company in Malaysia, will be the largest this year, raising about RM2bil. It will definitely be taken as a core holding of institutional fund managers and will be positioned along with other blue chips large market capitalisation stocks.
Market players in the oil and gas industry can also expect the announcement of the second consortium . It is anticipated that Crest Petroleum and Petra Perdana may be included.
Telekom, MMC, Crest Petroleum, Gamuda, Puncak Niaga.
Kenny Tan Wai Kuen CEO Alliance Unit Trust Management Bhd
Outlook for Q4
Overall, sentiment is more upbeat and visibility is improving. A slew of positive economic data has sparked optimism and this seems to have panned out over the past months. The domestic economy has been more resilient than expected, despite some hiccups, i.e. lurking fears of terrorist attacks.
The CI still has some catching up to do, as it is still a laggard vis-à-vis regional markets such as Thailand and Indonesia.
Against this backdrop, coupled with continuing positive merger and acquisition activities, it may be reasonable to expect the market to react positively. The local economy may be in full throttle next year.
With stronger economic numbers and a general election expected by the first half next year, the CI might surprise on upside in the next six months.
We will be adopting a two-pronged strategy. First, we will seek to capitalise on the restructuring themes .Hence, we are interested in Island & Peninsular.
We also like conceptual stocks such as Transmile and Petra Per- dana that will likely outperform in the current bullish sentiment. We have exposure in companies such as WCT and YLI Holdings, as both will benefit from the latest budget.
Second, we favour firms that can generate growth over the near to medium term i.e. Uchi Tech- nologies, due to the type of products manufactured, technology and market presence. Also, our major investments are targeted at companies whose management we are comfortable with and whose interests are aligned with that of minority shareholders, such as YTL Corp.
While maintaining our exposure to strong earnings growth companies, we will increase our exposure to defensive companies like Maxis for its steady business and decent dividend yield.
Important developments to look out for in Q4
The listing of Astro and Felda is expected to create strong interest in the market. The third-quarter 2003 positive economic data should set the momentum for the gross domestic product (GDP) to achieve 4.5% for the full year.
On the political front, the expected Cabinet reshuffle e.g new DPM, Finance Minister and possible announcement on the general election date are developments that should not be discounted.
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