Thursday, March 24, 2011

FBM KLCI Remained Resilient Despite External Jolts, 13-19 March 2011 Review

The market started the week with huge selling pressure as investors worry the earthquake in Japan will trigger another double-dip recession. Regional markets took
cues from Nikkei’s plunge with the MSCI Asia Ex-Japan tumbling more than 5%. However, as the week progressed markets slowly recovered on hope that the nuclear power plant fallout would be contained. For the week, the FBM KLCI edged up 8 points or 0.5% to close at 1,504 points. Local equity market continued to outperform the regional markets for the second consecutive week with the key benchmark index climbing back into positive territory while the MSCI Asia Ex-Japan registered -5.1%. Average daily trading value fell 10% to RM1.59 billion, which was 26% below the 3-month average of RM2.15 billion.

Equity Market Outlook
The FBM KLCI rebounded from its low to end the week in the black. Despite huge negative external news – Japan earthquake and crises in Middle East and North Africa
(MENA) - the FBM KLCI is still holding above 1,480 points. As such, we strongly believe that the market has stabilised and will stage a rebound from current levels.
We remain positive on equity given that Malaysia is far more resilient to external shock compares to the rest of the world.

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

Fixed Income
The global safe-haven shifted following the massive earthquake in Japan on 11 March dominating global markets including Malaysia last week. Strong buying interest flattened the benchmark yield curve as 10-year Malaysian Government Securities (MGS) yield plunged 12 basis points (bps) to 3.96% as compared to 3-year MGS yield which fell 2bps to 3.36%. Meanwhile, 7-year benchmark MGS dropped 3bps to 3.71%. Also noteworthy is the RM4.0 billion of 5.5-year MGS auction attracted a bid-to-offer ratio of 2.24 times at an average yield of 3.567% and was seen closing at 3.53% on Friday.

For local private debt securities (PDS) market, trading interest remains on AAA-rated/ Government Guaranteed (GG) papers, followed by AA-rated papers. Bonds from
the toll road, oil and gas as well as shipping sectors were at the top of the trading list.

Fixed Income Outlook
On local macroeconomics, we continue to see numbers pointing to a gradual but sustainable economy recovery. Inflationary fears for most emerging countries are seen tapering off. While Malaysia inflation numbers remain benign thus far, we expect renewed inflationary concerns on the back of further subsidy rationalization by the government.

Following the latest hawkish Monetary Policy Committee (MPC) statement, many economists view the statement as a signal that central bank may resume rate normalization in the next MPC meeting. We reiterate our view that Bank Negara Malaysia (BNM) will at most increase overnight policy rate (OPR) by another 50-75bps from the current 2.75% this year, with likelihood of bringing the rate hike earlier than 2H2011. Market will be watching out for the latest economic data and Consumer Price Index (CPI) readings as well as further indication from the central bank on assessment of economy condition.

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.

On foreign participation, 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. On the above backdrop, we expect local MGS market to remain volatile.

For corporate bond market, however, we maintain our view that credit market will be supported in conjunction with economy recovery. We expect companies to continue to report improvement in balance sheets and cash flow positions going forward. While we expect to see more bond offers coming on stream in 2011 on the back of more infrastructure projects announcement by the government, the current demand should be able to absorb the new issuances. Last but not least, rising risk appetite in tandem with positive credit outlook should also 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 issuances for yield pick-up.

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

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