Tuesday, February 22, 2011

FBM KLCI Clawed Back Above 1,500 Pts As Equities Recovered, 13-19 February 2011 Review

The market recovered from last week sell down, breaching the 1,500 physiological level again. The market tested the low of 1,490 before resume a strong rally in line with the regional movement. However, it underperformed the MSCI Asia Ex Japan as the index was up 2.4%. Average daily trading value declined 30% to RM1.96bn, 12% below the three-month average of RM2.24bn. KLCI’s performance next week is expected to be influenced by the regional peers. Dow Jones continued its upward trend while S&P500 up 6.6% year to date (YTD). We remain optimistic on KLCI’s longer term prospects as Malaysia remains very under-owned by foreign investors.

Equity Market Outlook
The market remains very volatile. Although investors remain upbeat on the fundamental but selling may persist. However, we believe the selling from the foreign funds is at the tail end, providing investors a good opportunity to collect good fundamental stock, particularly in gaming, bank, construction and steel. Maintain overweight.

Equity Market Strategy
Stock picking is still our strategy with preference for liquid fundamental
stocks on weakness.

Fixed Income
Bearish sentiment continued to cloud the Malaysian Government Securities (MGS) market. Selling pressure was seen across the curve on expectation of more new supplies especially the Government Guaranteed papers coming to the market sooner than later. In addition, speculation of further policy tightening and heightened inflationary concerns in the region drove government yields higher in general. Malaysia was no exception. 3-year benchmark closed 5bps higher at 3.25%. Despite selling during the week, 5-year and 7-year yields closed lower by 3bps each to 3.40% and 3.70% respectively. The 10-year new benchmark however saw buying interests,
closing the yield 4bps lower at 4.10%.

On economic data, Malaysia December crude plum oil (CPI) gained 2.2% year on year (yoy), higher than the 2.0% in the previous month. This is however in line with street consensus following the recent reduction in government subsidies on fuel and sugar.

For local private debt securities (PDS) market, flows remain focused on Government Guaranteed papers and AAA rated names, followed by the AA segment. Volume however eased compared to the previous week during the shortened trading week.

Fixed Income Outlook
On local macroeconomics, the numbers continued pointing to a gradual economy recovery going into 2011. Besides recent US data showing encouraging recovery, signaling a more supportive external environment, domestic consumption and private investment are expected to continue to drive economic growth. Meanwhile, given the significant surge in commodity prices, coupled with further subsidy rationalization,
higher inflation numbers seems to be on the horizon. While the reported numbers may remain benign at 2% - 3% in near term, further increase on fuel and food prices will likely renew inflationary concerns.

On supply and demand dynamics, we think the influx of Government Guaranteed (GG) papers will present supply risk given GG papers are viewed as good alternatives to government bonds. In terms of tenure distribution, with more longer-tenured issuances expected for both MGS and GG papers, MGS yield curve seem poises to a steepening bias. This however, with ample liquidity in the market, it may continue to lend support to the new supplies.

Despite the recent global funds easing out of the Asia Pacific as countries in the region continue tightening measures, we opined that current sentiments are still supportive of ringgit assets and hence, foreign holding should stay supportive at current level, if not higher in 2011. Nonetheless, suspicions over potential unwinding of MGS by foreign investors should continue to cloud the MGS market.

In terms of interest rate stance, we reiterate our view that central bank will resume rate normalization in 2011 by at most another 50-75bps from the current 2.75%, likely in the second half of 2011, as economy growth continues to gain traction.

For corporate bond market, we expect credit market to be supported given the pent-up demand and yield requirement built-up over the last two years. However, we expect to see more bond offers to come on stream in 2011 on the back of mega infrastructure projects announced by the government. Meanwhile, unless and until we see influx of corporate bond issuance that warrant supply concerns, we expect the current demand for credit will be sufficient to absorb the new issuance. Also, rising risk appetite in tandem with sustainable economy recovery should encourage investors to move down the credit curve in search for value .

Fixed Income Strategy
Overweight corporate bonds with focus on “AA” rated bonds. Look to participate in new issuance for yield pick-up.

Source for MGS levels: Bond Pricing Agency
Source: ING Funds Berhad

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