Wednesday, March 9, 2011

FBM KLCI Rebounded, Hovered Above 1,500 Key Level, 23 Feb -5 March 2011 Review

The market rebounded strongly as better-than-expected US job data eased concern about surging oil prices. So far, trade seems to focus on reallocation of risk within equities rather than a move out of stocks altogether. For the week, the FBM KLCI gained 33pts or 2.2% to close at 1,523 points, above the psychological support level of 1,500pts. However, the FBM KLCI underperformed the region as up to Thursday
the local benchmark index was up only 1.2% against a 2.0% increase for the MSCI Asia ex-Japan. The FBM Emas index rose 138.5 points or 1.4% to 10,364.7 points while the FBM Small Cap index decreased 1.7% or 210.3 points to 12,327.3 points. Average daily trading value fell 19.0% week-on-week (WoW) to RM1.7 billion, and was still 22.0% below the three-month average of RM2.2 billion.

Equity Market Outlook
The local equity market is still likely to follow the regional market movement. If external markets environment continue to show improvement, this rebound could still last a while longer. A push above the 50-day simple moving average (SMA) would probably induce more market participant to do bargain hunting. Technical indicators are showing signs of improvement as Moving Average Convergence Divergence (MACD) have staged a positive cross over while the Relative Strength Index (RSI) rebounded above the oversold territory. On the downside, if the prices break below the 1,474 level (intraday low of this downtrend period), we could expect the market to dwindle towards its 200-day SMA at 1,436 points. However, we are still optimistic about the FBM KLCI’s long term prospects as the domestic economy remains buoyant. We continue to favour plantation, bank, construction and property stocks.

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

Fixed Income
Malaysian Government Securities (MGS) momentum surged tremendously by 164.2% WoW, with continued focus on the 3-year sending yields down 2 basis points (bps) WoW to 3.36%. As for the mid-tenured benchmarks, the 5-year MGS climbed 2bps WoW to 3.43% and 7-year MGS rose 3bps WoW to 3.75%. Meanwhile, the 10-year remains unchanged at 4.08%.

On economic front, Malaysia’s exports grew the least in three months, at a pace of 3.0% year-on-year (YoY) in January 2011 (+4.6% in December 2010), missing consensus expectations of +4.5%. The slowdown was reflected in less electronics product shipments seen to China and the US. In contrast, imports were stronger in January 2011, rising 13.5% YoY from +11.5% in December 2010, despite also missing consensus forecast of +14.6%. This resulted in a narrowing trade surplus that fell more than forecasted to RM9.19 billion in January 2011, as compared to December 2010’s RM9.69 billion.

For local private debt securities (PDS) market, trading mix remains focused on AAA-rated papers, followed by AA-rated papers. Government-related as well as familiar names continued to dominate the PDS market.

Fixed Income Outlook
On local macroeconomics, we continue to see numbers pointing to a gradual but sustainable economy recovery. In general, latest US data continued to show encouraging recovery, signaling a more supportive external environment. Locally, domestic consumption and private investment are expected to drive economic growth. While inflationary fears are currently one of the biggest worries especially for most emerging countries, Malaysia inflation numbers remain benign relatively. However, we do not rule out renewed inflationary concerns triggered by further subsidy rationalization in response to higher oil and food prices.

On 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. However, we acknowledge Bank Negara Malaysia’s (BNM) reiteration of an accommodative stance and potential use of other policy tools such as statutory reserve requirement and lending measures to address risks of financial.

On supply and demand dynamics, market has generally expected a larger issuance size for government bonds for 2011. We think the unanticipated influx of Government Guaranteed (GG) papers and issuance size of the Private Placement for government bonds may present new supply pressure and influence direction of the bond yields. Nonetheless, ample liquidity in the market may continue to lend support to the new supplies.

Meanwhile, the latest number shows continual surge of holding in MGS and short-term Bills by foreign investors. This offers some confidence to the market that current sentiment remains supportive of ringgit assets. However, suspicion over potential reversal of capital flows are likely to constantly cloud the market sentiment and may intensify further should US economic data continue to surprise on the upside. On the above backdrop, we expect local MGS market to remain volatile.

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

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

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