Stocks: Cautious optimism reigns

  • Business
  • Saturday, 02 Jan 2010

EVERYONE said 2009 was going to be bad for stocks. But hey, on average, the regional markets have gone up 60% year to date. Investors who had been pessimistic have missed out, but is there a still a chance for them to make the same kind of profits?

With the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) having gained some 45% already, it may be foolhardy to expect similar returns this year.

After all, with the current fears of inflation creeping up, interest rates can only head north, translating into higher cost of funds for a still recovering economy.

While governments across the globe have been in overdrive with their stimulus packages, most of these measures are short term in nature and there is no guarantee they can nurse the economies back to their previous robustness.

Certainly, recent economic data point to a recovery, but we’ve also had to deal with nasty surprises like the Dubai debt crisis and Greece’s burgeoning debt situation, which threatens to bring the country to its knees.

HwangDBS Investment Management Bhd head of equities Gan Eng Peng believes we are moving past the “sweet spot” of the economic rebound, when stock returns are the strongest.

“This often occurs midway through a recession, when stimulus measures, both fiscal and monetary, begin to find traction and investor sentiment is negative,” he explains.

“Last year was when asset allocation was the key investment decision. As long as you were invested, you would have probably made money.

“We expect 2010 to be quite different. One needs to be more discerning. Choosing the correct themes, sectors and stocks will determine how one fares this year. How markets react to potential policy tightening would also impact returns,” he says.

JF Apex Securities Bhd chief operating officer Lim Teck Seng foresees a better first half for the stock market, as interest rates continue to be low.

“I don’t anticipate the US and the UK to hike rates until mid-June. In this sort of situation, hedge funds will be putting their money in the stock market. That the financial troubles in Greece and Dubai happened in 2009 is actually good for us. This means less bad news in 2010,” he says.

Teck Seng believes that for the first six months of the year, equities are still a good investment idea.

“We’ve got a Government spearheaded by Datuk Seri Najib Tun Razak, who is very pro business and eager to market Malaysia to the world. Other catalysts for the market include a few upcoming initial public offerings. All these should help boost the market by another 50-80 points,” he adds.

A cautionary note

Scott Lim, CEO and CIO of MIDF Amanah Asset Management Bhd, however, sees a riskier market and advises investors to “watch out”.

“This is because most people have anticipated the current recovery. With emerging markets having recovered close to 50% to 60% from the bottom, the downside risk might be significant,” he argues.

“For 2010, I foresee the market being volatile yet again. The market recovered substantially last year. People have been expecting a V-shaped recovery, and this was evident in the majority of stock prices.”

Private equity manager Sherilyn Foong says the outlook for the stock market is more favourable compared with the previous year, thanks to more concrete and consistent evidence of the “green shoots” sprouting and growing, although amid a fragile background of the premature pullback of global federal stimulus.

“The first half of the Year of the Tiger should hopefully see us roaring into a more solid second half, should global fiscal coordination efforts continue successfully and barring further external shocks to the global system, against a backdrop of consistently improving economic fundamentals,” she says.

Teck Seng of JF Apex foresees companies announcing better profits from the fourth quarter onwards. This means that the price/earnings ratios of the stocks will drop and they will become fundamentally more attractive.

“Besides, if the ringgit continues to appreciate, more foreign funds will slowly start to come in. This will boost the market,” he says.

He adds that the subsequent six months may be a trickier investing period as interest rates start going up. Other than that, he feels that the global economy is now on much better footing.

Teck Seng likes the food consumer and technology sectors. “I advise investors to focus on specific stocks. Don’t buy across the board,” he says.

However, Scott of MIDF Amanah Asset Management warns that it may be premature for people to turn more positive, buoyed by the rising confidence level.

“We need to look to the US for leads. There are still a lot of unsettled problems there. The debt restructuring issues in Dubai and Greece are just some examples. I feel we need to be a lot more diligent in tracking macro indicators instead of just the micro ones,” he says.

He believes that the sharp recovery of the market cannot continue beyond the first half of the year. As markets always tend to run ahead of the game, Scott advises investors to be wary. “Don’t chase performance and the recovery game. Let the recovery reach a more sustainable pace before coming back into the market.”

Earnings must catch up

HwangDBS Investment Management’s Gan says with the domestic stimulus package in its implementation phase now, we will see more announcements of construction companies getting contracts for infrastructure development.

This will not only create confidence in the local market but will also get the economy going again by creating jobs.

He anticipates the Government’s plan to privatise companies owned by Minister of Finance Inc (MoF) and other government agencies will be another positive for the stock exchange. He also welcomes the Government’s announcement of more disposals of shares in listed companies in the MoF/Khazanah Nasional Bhd stable.

“Given that components of the FBM KLCI are free-float weighted, lower government stakes could lift the weighting of government-linked companies (GLCs) in the index. Higher free floats could also help lift liquidity and valuations of these companies,” says Gan. “We foresee that this strategic move will impact the local bourse in a positive way.”

Scott says we need to see earnings catch up with the market, which cannot afford a second dip. The market’s woes peaked in early 2009, but this does not mean that all the problems are gone. Afterall, globally, most of the solutions are short term in nature. Once the feel-good factor runs its course, the recovery may sputter. Gan says one risk to monitor is the possibility of policy mistakes by the central banks.

“The biggest mistake would probably be to raise interest rates too fast, too soon,” he adds.

“However, we think this is unlikely as central banks remain vigilant to any hints of a double dip and are likely to utilise the tools in their arsenal to support growth.”

He points out that we should also monitor the level of inflation as this will directly impact the interest rate policy.

“Given the large output gap, inflation should remain subdued, although we should keep an eye on commodity prices,” he says.

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