Thursday, March 3, 2011

Strong Wall Street Performance Boosted KLCI, 23-27 February 2011 Review

KLCI stocks rose 3.3% boosted by the strong performance by Wall Street and favorable outcome for Umno party election. The smooth transition plan enlighten the market as people now believe the political stability that we enjoy for the past 50 years will soon be restored.

KLCI gained 26 points to close above the 880 level once again, signaling another short-term rally. We believe the market will try to retest the 900 resistance. The KLCI continued to underperform the regional markets for the four consecutive
weeks. Average daily volumes improved 57% week on week to RM915m versus RM585m
last week.

Equity Market Outlook
We expect the KLCI to follow the Wall Street’s performance with much stronger correlation. The smooth transition plan will ensure Malaysia’s political stability that could restores investors’ confident. Once the transition is done, the burden
will be on our incoming prime minister to deliver and reform as his promises.

Strategies outlook continues to argue for caution. The major indexes may have made important trading lows in early March, but economic and stock market risks remain elevated. The uptrend was halted by the short-term investors that had a bearish outlook. As such, accumulating the defensive stocks that yield good dividend promises an relatively exceptional profit at this moment.

Equity Market Strategy
Cautious on the market with focus on defensive companies with deep value, strong
pricing power, and sustainable dividend.

Fixed Income
The Malaysian Government Securities (MGS)benchmark closed mix on Friday ahead of the release of revised 2009 MGS/GII issuance calendar by the Bank Negara Malaysia (BNM). On a week-on-week (WoW) basis, the 3-year climbed 3 basis points (bps) to 2.65%, while the 5-year and 10-year benchmark yields tumbled by 28bps and 20bps respectively to 3.55% and 4.02%.

For corporate bond market, trading activities were moderate especially on high-grade and shorter-end papers.

Fixed Income Outlook
While supply concerns triggered by the second stimulus package is not totally out of the wood, the much lesser supply for the long-dated government bonds as reflected in the new auction calendar is expected to markedly reduce the pressure on the long-end MGS.

BNM surprised the market by reducing the long-dated supply significantly in the revised 2009 MGS/GII issuance calendar. 5 issuances of 10 and 20-year MGS have been scrapped and replaced by issuances of 2 and 3-year MGS. The move is viewed as positive for long-end MGS, and will likely lead to flattening of the yield curve. A flatter curve would lead to lower cost of long-term funding especially for long-term projects and will encourage issuance of longertenure private debt securities (PDS).

Meanwhile short-end MGS will likely be continually supported by the potential interest rate cut. That said, further monetary action will be much dependent on economic data released in the coming months. Of note, the latest economic
data all point to further drags on growth, if not a deeper recession.

On credit market, selective high-grade corporate bonds are expected to be sought after due to scarce supply and yield enhancement requirements. Having said that, the overall corporate bond market is expected to remain sluggish as credit market continues to deteriorate.

Fixed Income Strategy
Remain cautious and defensive on credit. Accumulate high-grade bonds.

Source for MGS levels: BondWeb 23/3/2009
Source: ING Funds Berhad

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