What’s next for the KL market?

  • Business
  • Friday, 22 Dec 2006

CHRISTMAS treats and year-end bonuses arrived early this year for stock investors as the bull staged a comeback to stock markets worldwide.  

The Kuala Lumpur Composite Index (KLCI) has been on a steep upward trajectory, rising 11.7% from Nov 7 opening of 993.68 points to 1,110.12 – close to a 10-year high – on Dec 11.  

The KLCI component stocks were buoyed by the inflow of foreign funds in tandem with the strengthening of the ringgit against the dollar.  

Furthermore, the rise in US stocks, coupled with the slew of merger and acquisition deals among Malaysia’s public listed companies, most recently in the plantation and banking sectors, fed the heady bullishness in the local stock market.  

The daily trading volume hit an all-time high of 2.19 billion shares on Dec 6 when the KLCI hit 1,103.27. The bullish sentiment lingered and the KLCI continued to climb higher on Dec 11, supported by GENTING BHD’s success in clinching the Sentosa Island integrated resort project, and the Wilmar-PPB Oil merger proposal.  

Among Asian markets, the KLCI ranks eighth in terms of appreciation year-to-date --APpic

On Dec 19, however, the KLCI, along with regional indices tumbled, tracking declines in US stocks but the blame largely fell on the Thai government’s tough measures on new inflows of foreign funds to curb speculative inflows. The KLCI erased 2% of its gains in one day.  

The Thai government’s capital control measures hastened the much anticipated market correction in the KLCI. The benchmark, which has risen 25.7% from a low of 883.29 on June 15 to a high of 1,110.12 on Dec 11, left many wondering if the market would go into a correction. 

Among Asian markets, the KLCI ranks eighth in terms of appreciation year-to-date, ahead of Japan, South Korea, Taiwan and Thailand, supporting arguments for further upside for the KLCI (See table)

However, an analysis of the highs achieved by stock markets in May this year compared with their closings on Dec 20 indicates that the KLCI is already trading at a higher multiple than many other markets in the region. The KLCI’s Dec-May high multiple is only behind those of Shanghai, Jakarta and the Philippines.  

On Tuesday, following the Thai government’s announcement, the immediate support of 1,070 was broken as the KLCI closed at 1,060.36. 

The next day, markets rebounded as the Thai authorities scaled back the restrictions on stock investments. The KLCI broke the immediate resistance of 1,070 and closed at 1,076.3.  

But the tone remained cautious as the market traded thinly, with 821.4 million shares changing hands compared with the all-time high of two billion shares on Dec 6.  

A more relevant question at this point is whether the market has fully corrected or will there be more shocks down the road. As the year winds down, the market upside may be limited for now as investors trim their portfolio going into the Christmas and year-end break.  

Furthermore, foreign investors, still jittery over the Thai debacle, may prefer to wait and see before returning to emerging markets in full force. Hence, it appears that the market may head into a phase of consolidation after the rapid upward momentum of the past four months. 

Fundamentally, the Malaysian market remains sound. The outlook for 2007 remains upbeat, driven by earnings growth of at least 10% compared with flat earnings growth in 2006.  

Brokers also expect the next general election, expected to be held in late 2007 or early 2008, to generate “feel good'' vibes and provide further upside to the KLCI.  

Visit Malaysia Year 2007 should also offer some cheer, especially for travel-related counters while the implementation of the Ninth Malaysia Plan is another catalyst.  

Furthermore, positive sentiment from the US markets should continue to support the KLCI. Brokers’ end-2007 targets for the KLCI range between 1,075 and 1,300. 

Yesterday, investors continued to trade cautiously as the KLCI closed just a tad higher at 1,076.68. A total of 747.04 million shares were traded. 


  • This report is written by Mayban Investment Management Sdn Bhd
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