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Upward Trend Continues
Malaysia Perspective | 01 October 2010
By:

By Yeoh Mei Kei

The Malaysian equity market posted an upward trend in the month of August despite the temporary drop in the second week of August. News in August came in mixed, but there was positive news including the strong GDP growth in Germany and better than expected corporate earnings results in US, which continued to support the KLCI’s upward trend. The last week of July saw KLCI increased from 1,337.67 points on 20th July 2010 to 1,360.92 points at the end of July. The KLCI continued to rise in the beginning of August and reached 1,363.83 points on 3rd August 2010 on the back of improved investors’ sentiment by the newly released corporate earnings results from US. The KLCI remained flat at the 1,360 level before it decreased to as low as 1,349.33 points on 12th August 2010. The temporary plunge of KLCI was due to the negative news from Japan and China, in which Japan reported fewer-than-estimated machinery order, while China’s exports and imports growth slowed down in July. Nonetheless, KLCI managed to rebound and trend upwards to reach 1,395.02 points on 20th August 2010, supported by positive news from Germany. This could signal acceleration in the economic recovery in European countries despite the lingering sovereign debt crisis. Trading in KLSE was more active in August as compared to July as trading volume rose to 918.1 million shares per day in August (as at 20th August 2010) from 676.7 million shares per day in July.

On the global economic front, global manufacturing activities in July dropped further from its post-recession peak seen in April, reporting its lowest reading for the past seven months. The global PMI (Purchasing Managers Index) dropped to 54.3 in July from 55.0 in June, as input prices grew at a slower pace and backlogs of work reduced. US Chicago PMI and European PMI in July registered better than the global average, at 62.3 and 56.7 respectively. For China, it continued to register weaker PMI which has eased for the 3rd consecutive month to 51.2 in July from 52.1 in June, reflecting the combined effect of credit tightening, property cooling measures and measures to cut capacity in energy-intensive sectors. As the PMI readings remain above 50.0, this could indicate an economic expansion, but with a slower pace.

The 2Q 2010 GDP (Gross Domestic Production) year-on-year growth for US rose 2.4% after the 3.7% increase in 1Q 2010, which was slightly below consensus forecast of a 2.5% increase. The slower economy growth has raised concern over the strength of recovery. Nonetheless, private domestic investment is expected to be the main supporter of US recovery in 2010 as evidenced by the GDP data, in which gross private domestic investment has reported strong double digit quarterly growth for three consecutive quarters. For 2Q 2010, gross private domestic investment posted a strong 28.8% increase. In addition, the US posted a solid 2Q corporate earnings season, with 77% of 350 companies in the S&P500 topped analysts’ earnings estimates. Investor sentiment is expected to improve due to better-than-expected corporate earnings and improved manufacturing data.

Over to the Eurozone, the German economy expanded 2.2% quarter-on-quarter in 2Q 2010, which was the fastest quarterly increase since the country reunified in 1990s. This export-oriented country is the largest economy in Europe. Hence, the forecast-beating surge in Germany’s GDP has led the aggregated GDP for the 16 countries in Eurozone to grow by 1.0% quarter-on-quarter. As the European debt crisis is not entirely solved, global economic growth is expected to be moderate and domestic demand in Europe could remain weak. The ECB (European Central Bank) expects there will be a moderate but still unstable recovery in the Eurozone.

In Asia, several countries such as Singapore and Indonesia released their GDP figures for 2Q 2010. Singapore economy grew slightly lower than the strong growth achieved in 1Q 2010, reporting a quarter-on-quarter 24.0% growth and year-on-year 18.8% growth in GDP for 2Q 2010. This could signal that the growth momentum will moderate in the second half of 2010 due to a slowdown in global economy. This, along with the fact that current monetary policy seems adequate in curbing inflationary pressure that has emerged from the strong recovery, will suggest that the MAS (Monetary Authority of Singapore) will most likely keep interest rate unchanged during the next monetary meeting in October.

On the other hand, Indonesia GDP grew by 6.2% year-on-year. The strong economic growth in Indonesia was mainly driven by private consumption, investment and exports, while government consumption continued to be the negative contributor. On quarter-on-quarter basis, the GDP grew by 2.8%, which was quicker than the 1.93% increase in 1Q 2010. The strong growth in Indonesian GDP number has raised investors’ concern over the hike of reference rate. Strengthening economy and accelerating inflation in Indonesia left Bank Indonesia with no choice but to raise the reference rate. Over the long term, the Indonesian economic growth could remain robust, supported by the strengthening domestic fundamentals and strong demand for its commodities. Thus, the Indonesian economy is expected to be less vulnerable to the uncertain outlook from the rest of the world, especially from US and European countries.

On the local front, the Malaysian government took its first step to reduce its huge subsidy bill by increasing the prices of fuel and sugar. The Malaysian equity market is expected to perform better as the savings from the subsidy cut (which are non-productive) could be channeled to other government developments that are productive, have high spill over benefits, and can spur growth in the economy. These would increase the attractiveness and investability of the Malaysian equity market, especially to foreign investors. On the other hand, Malaysia 2Q GDP year-on-year grew 8.9%, which is better than the consensus estimations of an 8.4% growth. Manufacturing and service sectors, private consumption and export continued to be the impetus. Due to the global economic slowdown and easing growth of China, the Malaysian economy could grow more moderately at about 5% to 6% for the second half of 2010.

In the corporate scene, Tanjong Plc received a conditional takeover offer from Tanjong Capital Sdn Bhd to acquire all the ordinary shares at a cash offer price of RM21.80 per Tanjong Plc’s shares. The offer price represents a premium of 21.92% over the last closing price of RM17.88 per share prior to the announcement. The privatization of Tanjong Plc will allow the company to seek out long term capital source to develop its power generation business by investing in the Middle East, North Africa and South East Asia.

On the other hand, DRB-Hicom, one of the Malaysia’s largest car distributors and importers, has inked a MOU (memorandum of understanding) with Volkswagen AG, Europe’s largest motor-vehicle manufacturer to assemble and manufacture vehicles in Pekan, Malaysia. DRB-Hicom and Volkswagen would jointly plan the production of Volkswagen models in Malaysia, and this would strengthen Volkswagen’s existing vehicle sales and market presence in Malaysia. For DRB-Hicom, this would allow its component manufacturing companies to have full participation in supporting Volkswagen’s localization programme.

Proton and Perodua are looking at potential merger opportunity. Although the merger between these two entities is welcomed, the process can be difficult because it involves both parties’ willingness to share trade secrets in this highly-competitive automotive sector, which is quite unlikely.

The global economic is still on the path of recovery, but economic growth in advanced economies such as US could slowdown due to the weaker consumer sentiment and weaker investors’ confidence. The European economy could recover faster than expected, led by Germany, which is the largest economy in Europe. Asia could remain the main driver for global economic recovery due to the stronger demand seen from consumption, exports and manufacturing. Some countries in Asia such as Singapore, Indonesia and Malaysia still have ample room to raise the interest rates in order to battle the inflation that could emerge from a strong economic recovery. Given that the fundamentals of emerging markets and Asian countries remain healthy while valuations remain cheap, investors may see the current stage as an opportunity to invest in emerging and Asian markets.

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