Market rebound seen for H2

As the first half of the year draws to a close, investors are wondering what is in store for stocks on Bursa Malaysia after the strong rally that took the KLCI slightly beyond the 900-point level dissipated. 

High oil prices, rising interest rates and a cooling of China's roaring economy were the culprits that dampened sentiment in the second quarter. The question is: will they continue to so in the second half year? 

StarBiz assistant news editor Jagdev Singh Sidhu and senior writer Kathy Fong sat down with AmResearch executive director Gan Kim Khoon, Singular Asset Management Sdn Bhd managing director Teoh Kok Lin, Kenanga Investment Management Sdn Bhd director/fund manager Johan Tazrin Hamid Ngo, OSK Research general manager Pankaj Kumar and TA Securities head of research C.K Ngu to get their views on the stock market and outlook for the second half of the year.  

StarBiz assistant news editor Jagdev Singh Sidhu and senior writer Kathy Fong sat down with AmResearch executive director Gan Kim Khoon, Singular Asset Management Sdn Bhd managing director Teoh Kok Lin, Kenanga Investment Management Sdn Bhd director/fund manager Johan Tazrin Hamid Ngo, OSK Research general manager Pankaj Kumar and TA Securities head of research C.K Ngu to get their views on the stock market and outlook for the second half of the year. 

StarBiz: What do you think of the stock market and the Malaysian economy?  

Johan Tazrin Hamid Ngo


Johan: We had a strong start followed by the mid-cycle correction. That's where we are right now. The only difference is that the mid-cycle correction started a lot sooner than we anticipated as we were expecting (the correction) to start early in the second half of the year. And the catalyst for that was geopolitical risks like deeper concerns on US interest rate, oil prices and China. 

The market has discounted a fair bit of those factors. The Kuala Lumpur Composite Index (KLCI) has rebounded by 10% since its trough but the broader market is much lower than that and valuations have come down. 

The fundamentals are there but sentiment isn’t. It is not surprising given the strong gains last year that people are keen to lock in profits.  

The uncertainties would remain because we are about to enter the rising interest rate environment, something we have not seen for four years. We are rising from the lowest base ever at 1%. Historically during the past two rising rate cycles, the market had been flattish from the start to the end but volatile during those periods. We reckon it is possible see a repeat this time. 

To a certain extent the market has factored in a rising interest rate scenario but one of steady or moderate rate rises. Volatility would come based on the actual events relative to expectations.  

I think it is going to be a volatile market. It is going to be quite directionless in the short term. Having said that, after three months of weakness, there is a chance of a broader technical rebound in the early part of the second half of this year.  


Gan Kim Khoon

Gan: After the rally in the first quarter, the market is now running into some strong headwinds. Although the market, to a large extent, priced in some concerns but these headwinds could recur in the second half of this year. For example, most of us have factored in 25 basis point rise in US rates by end of this month but going forward we are going to be in a rising interest environment. The question is how fast and to what extent will interest rates be rising?  

In the short term, we think the market is going to be quite directionless and sideways, perhaps with a downward bias. 

If we look at the market, one key difference this time is that the downtrend is largely caused by external factors, which are beyond Malaysia’s control.  

I think some of these concerns may have subsided but they may recur when we see crude oil prices coming up again or interest rates rising sharper than expected.  


Teoh Kok Lin

Teoh: A lot of the interest rate hike has been discounted by the market. When people focus on interest rates, a lot is actually noise, even if interest rates were to rise from 1% to 2.5% or 3%, it is still very low.  

If you go back 10 or 20 years, the average is probably about 4%, so interest rates at 2% or 3% is still very low. And it doesn’t mean that when interest rates go up, equity prices have to come down.  

We are still at the early part of an interest rate up-cycle. As long as the economy continues to do well and earnings growth continue to be well ahead of interest rate increases, I think equities can do well in the rising interest rate environment, especially in the early part of it.  

I want to stress the point that rising interest rates doesn't automatically mean it is bad. It depends on which part of the cycle we are in.  

Pankaj Kumar

Pankaj: I think the market is always about the four things – confidence, sentiment, psychology and fundamentals. We are in the environment where the external factors dictate the direction of our economy or market. But if you look at the fundamental value of the market, the price-earnings ratio (P/E) of the market, it is obvious that valuations are not expensive on historical basis and also the post crisis period. The market is attractive if you look at 2005 (earnings) numbers.  

Even in the worst-case scenario, assuming earnings will fall short of expectations by 10%, valuations are still not expensive. We are bearish on short-term basis but bullish on long term prospective. In an investment horizon of 12-18 months, we are still excited about the market and there is still value out there. There could be some downside, but be prepared to accumulate those stocks.  



Ngu: I consider not only the concern about the US interest rate hike as noise, but also oil prices and the potential slowdown in China's economy.  

Given the very low interest rates that we have globally, any increase is probably not going to derail the growth of the global economy.  

On the flip side, we could argue that an increase in interest rate could potentially drive people to spend to lock in on low rates at this point and this can spur spending and economic growth.  

Once the hike starts, we would probably see the market gain confidence and start going up again.  


StarBiz: How are things going to unfold over the next six months and are you expecting a rebound in the second half of the year?  


Johan: Some of the concerns affecting the markets are slowly starting to unravel. Look at the oil prices, it’s actually off its highs and some are saying it should go down to around US$30 per barrel or lower.  

That could lead to a potential positive in the short-term. For China, the economic data recently has shown some moderation and if that continues, it will generally lead to a little more positive feeling in the short term.  

Once people see the rates rise, that could be a psychological short-term positive.  

You could see a broader technical rebound but I am not so sure whether it is going to be sustainable. 

We reckon that the market is going to trade in a very wide range.  


Pankaj: In terms of the direction of the market over the next 6 months, we believe that there will be another dip. We are looking at the 730-750 level as a good technical level or even fundamental value for investors to get in. That would be a good entry point. But timing is a bit difficult to tell. 

Generally we believe that the fourth quarter is going to be a lot better than the third quarter. But on the broader prospective, a lot of stocks are trading at levels where the CI was trading at the 600 or 650 level.  

Gan: The four main concerns that we mentioned earlier may have already discounted to a large extent in the market. But that itself is not going to be sufficient for the market to rally or rebound.  

For a market to stage a rebound, we need some catalysts like significant earnings upgrades or events.  


StarBiz: What is going to lift the entire situation surrounding the equities?  


Teoh: The market, in the shorter-term, is always driven by sentiment and tends to overshoot on the upside and downside.  

The economic news has been great with China being able to engineer a fairly decent slowdown and in Japan, the growth is phenomenal. That is going to drive Asian growth.  

And we are saying that sentiment could change quite quickly. Maybe by end of this month, or July, we could see a good rally because by then the US Fed would have increased interest rates and that may be the trigger. With the increase, people may think that the Fed is not behind the curve and plough back in the market. People are waiting for things to happen. 

Trying to guess what will be the exact trigger could be quite dangerous. All you can do is to look at a slightly longer term and ask whether they are comfortable in terms of risk and return.  

I think the market is becoming very attractive in the sense that a lot of investment risk has been taken out. What is going to drive the market in the next six to nine months, besides the big external factors, has to go back to fundamentals and economy.  

The government is talking about restarting infrastructure projects and that may help (to spur growth). That is something we may have to watch out for together with corporate earnings.  

There could be a nice technical rebound in the short-term. As to how sustainable that rebound will be, one has to see the economic development both domestically and globally, like what happens in the budget and in politics. 


StarBiz: What is your impression on foreign fund flow over the next half year and what will be the catalyst to attract such money into Malaysia?  


Ngu: Foreign fund flow will depend on global factors. The economic development in the region and globally will determine to a certain extent the overall flow of funds into Malaysia. Beyond that, domestically, we also need to have the attraction to pull foreign funds into Malaysia.  

One of the key issues is the change being introduced by Prime Minister Datuk Seri Abdullah Ahmad Badawi's administration. I think foreign funds are watching those developments closely and if they turn favourable, we could probably see greater flow of foreign funds (coming into Malaysia).  

And related to that is the big blue chips and most of them are government-linked companies. Half of the market cap of the top 20 companies on Bursa Malaysia belong to GLCs. 

They have to perform in the sense that their earnings and their prospects have to be good in order to attract foreign funds to come back into Malaysia. 


StarBiz: Do you think what the Government has done so far in terms of initiating policy and coming out with future direction for economic growth in the country is sufficient to attract or to appeal to foreign investors?  


Ngu: So far, I think the new initiatives are fine but we want to see more of the execution. When we talk about eradicating corruption, improving public service delivery, GLCs turning around to become globally competitive companies, we have heard a lot in terms of headlines but in terms of key details and execution, we have not really seen that.  


Johan: When the initiatives (to improve GLCs) were announced, it did attract the attention of a lot of foreign fund managers. They are talking about it a lot. If Asia were stable at that time, you would see a lot of GLCs doing better. 

Having said that, there is one GLC that is attracting a lot of attention, and that is Telekom Malaysia. The reason is: Telekom is one of the first to walk the talk in terms of showing an improvement on its numbers in the first quarter. When the numbers came out, lots of fund managers and analysts were generally in disbelief that the margin on the fixed line could improve so much.  

I think all of us were quite cynical that it might not be sustainable but when the company explained why, it probably is. And speaking to people within Telekom, there have been some positive changes there and they have not been fully factored in (by the market). 

Foreigners do like the positive noises in terms of GLC restructuring and all that. To some extent they have been buying. But there is a danger of expecting too much and too soon. In fact, looking at some of the numbers of various stockbroking houses, I think they are probably expecting something short of a miracle. It will take time but the Government, GLCs and corporate Malaysia have to demonstrate that they are walking the talk and that will gather a lot more confidence to the whole GLC theme. 


Teoh: I've been dealing with foreign fund managers over the last 10-15 years. They've always had a love-hate relationship with Malaysia. But deep down, they do see a lot of value in Malaysia. To say whether the Government has done enough or not, I think, is not a fair comment. The most important thing is the people.  

Today, we have people like Tan Sri Nor Mohamed Yakcop and Azman Mokhtar, who have been in the capital market dealing with foreign fund managers. So they know what needs to be done. That is a lot more important because once you have the right people there, give them time for execution and implementation.  

The moment they launch all these things do you expect foreign funds to flow in directly? No, I think they want to look at the regional economic environment. The fact that we had tumbled less than the regional market shows that we are not that bad. In fact they started to come back end of last year and beginning of this year. There is a lot of interest and enquires. I think they will definitely come back in a big way.  


StarBiz: Apart from the obvious perception changes, what is there else about the revamp of GLCs that the market and investors should get excited about?  


Gan: I have a different view of the revamp of GLCs. When people have low expectations, the move by the Government to revamp GLCs will naturally seem to be a move in the right direction. 

So far what we have seen is merely changes at the very top. We do not know if that change that has started would actually permeate all the way down to the senior management level or even to the middle management level. I think that's quite critical if you are expecting significant results from the revamp of GLCs.  

The second point is the business model of GLCs, where some of them are monopolists or near monopolists.  

The question that has to be asked is having been a monopoly, why haven't the results been what one would expect from a monopoly? How much more can be done to improve their results going forward?  

The third issue is balancing shareholder interest and national interest. So does the Government go for the broader interest or the narrower interest. My main concern is that since the idea was mooted, the market is now expecting miracles from the revamp. My concern is that if all these built-up expectations are not delivered, then you could see disappointments. Also we should not be overly optimistic in expecting results within three months or six months, or even a year.  


StarBiz: Given that these are government agencies that have inherent hierarchy and structural issues that have formed over time and need time to unwind, do you think the revamp could be successful over a very short period of time?  


Ngu: My expectation is quite high on the revamp itself. I believe the momentum has to carry on. We have the right people, the right environment, and it is the right time for us to carry this out.  

If it is going to take 10 years, then I think it is going to be too long. Taking note of what has been mentioned earlier, the Government should be transparent on the milestones that they want to achieve. 

Given that the tenure for the new CEOs is only three years, I would expect the milestone to be fairly quick as well.  


StarBiz: If you expect more changes to unfold over time, which of the GLCs would you be most excited about and have the greatest potential to surprise in terms of earnings? 


Johan: If I were buying into GLCs, I would not be buying a basket of GLCs. I would probably just focus on one that I feel would show the earliest results. 

Out of all of them, I will pick Telekom. A lot of fund managers have come out feeling positive after speaking with the company. There is quite a clear direction as to what they want to do. 

The national interest in Tenaga Nasional is too difficult to change. I think the bias will be more on national interest than shareholder interest although it is slowly shifting. 

I am quite impressed with Sime Darby and their cost saving in the Hyundai-Berjaya acquisition. They have a new chief executive and he is already saving the company money.  

Having said that, valuation (wise), Sime Darby is not expensive and not cheap either.  


Pankaj: The market will be watching how margins will improve over the next two to three quarters. 


Gan: Another GLC stock that I want to add to the list is Malaysia Airlines. Notwithstanding the short-term noises such as rising crude oil prices, a lot of good work has been put in place and that could continue.  


Teoh: The key thing here is to keep the momentum going because you are trying to change culture, which is something that is extremely difficult to change.  

Eventually, we will be looking at the political will to change. People like Azman would need continued support to carry out things, some of which may not be popular. 

I think MISC (Malaysia International Shipping Corp) has a fantastic example. Petronas took it over and had a very strong will to push through their culture. And now, big results are coming through.  


StarBiz: If you look at the revamp of GLCs from the regional benchmark prospective, do you feel the GLCs got a long way to go in order to catch up and be competitively valued against their counterparts?  


Teoh: It is the question of getting the top-down policy and culture correct. Malaysia is capable of turning many of these GLCs into multinational companies.  

The issue now is the policy. The composition of the board always has to balance between social interest and regulatory. The Government should put more commercial people on the boards of GLCs and I think that is part and parcel of the revamp and getting people excited about.  

At the end of the day, it is really political will and ensuring that the top people are empowered with the mandates, and are given the full powers and responsibilities. They are going to have a lot of resistance in executing because of various interested parties.  


Ngu: Take a look at Singapore Post for example. Their ROE (return on equity) is over 20%, but Pos Malaysia is only at 4%-5%. That shows you how big the gap is.  


Part two will appear on Wednesday 

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights

Next In Business News

Malaysia looking forward to welcoming China in CPTPP as early as next year
Indonesia’s halt to palm oil expansion set to expire soon
China defends tech crackdown in meeting with Wall Street chiefs
CPO futures likely to see technical correction next week
Evergrande says six execs redeemed investment products in advance
Infineon opens Austria plant early in chip capacity boost
Indonesia may reopen to tourists from some countries in October
Airbus reaches deal to restructure AirAsia jet order
Oil price falls as storm-hit US supply trickles back into market
World shares fall as markets await Fed meeting, taper timeline

Stories You'll Enjoy