Fund managers look towards upside on KLSE


AS THE KLSE Composite Index (CI) continued its climb last week to breach the 800 mark, fund managers said they wouldn’t be surprised to see the index touching 1,000 points within the next six to 12 months as more foreign funds find their way back to the bourse they had abandoned some years ago. 

They said the KLSE was still cheaper and a laggard compared with most other regional markets despite having appreciated some 16% over the last three months. The CI stood at 691 on July 27 and talk then was of it reaching 780 points by year-end, a mark that has clearly been passed already. 

Although many managers' expectations are now located within a band of between 820 and 880, all conceded that a liquidity-driven market could push the CI well beyond that, with some saying 1,000 points was “very conceivable.” 

Amin Rafie Othman

One investment manager said the index had become such a moving target he had given up altogether on predicting where it would end up. He said it was “anybody’s guess” how high the market would go given the combination of foreign funds and renewed interest from local investors that was fuelling the acceleration. 

As the clock ticks away for Datuk Seri Dr Mahathir Mohamad's retirement as prime minister this Friday after 22 years, the market has become increasingly convinced that the expected smooth transition to Datuk Seri Abdullah Ahmad Badawi would ensure political stability. 

Coupled with the brighter economic outlook of late, the largely optimistic scenario being played out should see a further upside for the CI that was now in the early phases of its next rally, they said.  

The local bourse closed last Thursday 23.38 points higher on the week at 804.43 in what analysts deem a breakout after nearly two weeks of consolidation. 

Mayban Investment Management Sdn Bhd chief executive Amin Rafie Othman described the current market as “at the confluence of positive indicators.” 

He said foreign funds were busy promoting Malaysia following last month's raising by Standard & Poor's of the country's long-term foreign currency sovereign credit rating to A- from BBB+ and recent upgrades to “overweight” by almost all major foreign brokers. 

New initial public offerings such as for Astro All Asia Networks plc that would be listed on the KLSE main board on Wednesday would be further catalysts, he said.  

“This is anecdotal but foreign fund managers seem to say they're interested? there're more funds that are likely to come in.” 

Amin Rafie, whose own CI target of 780 for the year-end had been breached, said the size of foreign liquidity that had flooded the market during the past few months had been beyond his expectations.  

Foreign equity fund managers put in some US$452mil into the KLSE during the past three months according to Fund Research (EPFR), which tracks such movements. EPFR said this added about 23% to foreign holdings of Malaysian equities during the period.  

Amin Rafie said local funds were buying, too. “They are trying to play catch-up right now.” 

He said based on a five-year average of 15 times PE, the market should technically settle between 840 and 850. However, with the added liquidity, “it would be even higher.” 

Pacific Mutual Fund Bhd chief executive officer Michael Auyeung agreed that in such market conditions, “valuations tend to take a back seat.” 

Micheal Auyeung

He said although even based on valuation, stocks on the KLSE stocks were still attractive; the liquidity-driven market would ensure the CI breaks through his fair value for the market of some 880 points. 

“We're just getting a taste of what a liquidity driven market is like,” said Auyeung, adding that there was more to come. “Exceeding the 880 level next year would be easy. And reaching 1,000 points? That's very conceivable.” 

Current interest was in domestic consumption and resource-based stocks, he said. 

Auyeung said the recent ratings upgrade of the Malaysian market has brought in long-term funds but hedge funds or “hot” money could equally be tempted by the recent rallies. 

Therefore, he warned, the upward journey may not be a smooth one. “Long-term investors looking at a 12 to 18-month horizon should be comfortable, but those taking a trading stance should be prepared for occasional retreats of anything up to 5%,” he said.  

Although bullish on the market, SBB Mutual Bhd chief executive officer Paul Low said sentiment on the KLSE was still affected by the state of the US economy. 

“As long as the US recovery can keep its momentum, we will be okay,” he said, pointing out that in the coming election year in America, its Federal Reserve was unlikely to jeopardise jobs by raising interest rates. 

Low said the CI had “some more to go” to some 850 by year end, but the recurrence of SARS or another terrorist attack in the region could change that.  

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