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Strong Performance In September Buoyed By Inflow Of Foreign Funds
Malaysia Perspective | 11 October 2010

By Yeoh Mei Kei

Malaysia’s equity market displayed a strong performance in the month of September, reaching a high of 1,466.97 points as at 17th September 2010. KLCI has been on a rising trend since mid-August, and this trend has resumed after a relatively flat performance in early September due to the Hari Raya break. It is interesting to note that the trading volume in KLCI has been pretty strong prior and after the holiday break, where on both periods, trading volume actually surpassed the 1 billion shares mark once. The strong performance was mainly due to foreign fund inflows in anticipation of a further liberalisation and appreciation of Ringgit. Based on limited data from Bursa, average foreign participation in KLSE is 28.4% (in value term) for August 2010, and this has actually surged to 31.1% on 15th September 2010.

Overall, on the global economic front, a surprise bounce in manufacturing activity in the world’s two biggest economies in August showed that the world economy was still recovering rapidly and the chances of a double-dip recession had receded. The closely watched figures from the Institute of Supply Management pointed to an acceleration of output growth, where US PMI (Purchasing Managers’ Index) rose from 55.5 in July to 56.3 in August. This was matched by an unexpected bounce in the official August PMI indices in China to 51.7 from 51.2 in July. However, the Global PMI fell in August to 53.8 from 54.3 in June, but was still above the 50 mark for 15 consecutive months. Readings of above 50 indicate expansion while readings below 50 indicate contraction.

Japan has come into the international news limelight recently with the re-election of Mr. Naoto Kan as the Prime Minister after successfully fending off a challenge to his leadership from Ichiro Ozawa. Mr. Kan’s victory has sent the yen climbing to a new 15-year high of ¥82.90 to the dollar. To stem the strong rise in Yen that badly affect its exports, the Japanese government has intervened in the forex market for the first time since 2004. This has proven to be successful and the yen actually weakened by 2% to ¥85.79 as at 17 September 2010. Although this currency intervention drew much negative criticism from the international community, the Japanese government will still continue to intervene if necessary as it is undesirable for them to have the strong yen prolonged given the risk of deflation in the Japanese economy.

Two promising economic statistics released over the month have allayed the fears of a double-dip recession in the US. First, US jobs data has shown that the private sector had added better-than-expected 67,000 new jobs in August, and there were also an upwards revision of 107,000 jobs creation (from 71,000 initially reported) for the previous two months. Secondly, US retail sales recorded a stronger-than-expected growth, rising by 0.4% qoq in August, bringing this to two consecutive month of growth for retail sales. Excluding purchases of cars, which tend to have volatile swings on a monthly basis, retail sales were actually up by 0.6% between July and August. Retail sales are a closely watched economic indicator as consumer spending accounts for about 70% of economic activity in the US. Evidence of improving trend in household spending, as indicated by the rising retail sales, suggests that consumer sentiments were not as pessimistic as what market expected that could lead to a double-dip recession for the US.

The mid-term election for US is coming up in November, and this, directly or indirectly, usually means that policy or measures would be introduced to win over voters. Of the most important, US has started again to pressure China to allow its currency to appreciate and was looking at a range of measures to tackle it. Some measures being proposed includes declaring Chinese currency manipulation as an illegal export subsidy, taking a case against China to the World Trade Organisation, and in the worst situation, naming China as a currency manipulator.

In order to prevent the economy from overheating, the Chinese government has in recent months called for inefficient factories to be closed, launched a clampdown on property speculation, and pushed banks to rein in lending. These inevitably will lead to a slowdown in the economy. Nevertheless, the Chinese economy appears to be stabilising after several months of slowdown, reducing the risk that the country will suffer a hard landing as a post-crisis stimulus is withdrawn. Industrial production and retail sales both grew more quickly in August than in July, reversing the trend of the previous 4 months of slowing expansion. Industrial production grew more strongly than expected in August by 13.9% y-o-y (July 13.4% y-o-y), while retails sales have risen strongly by 18.4% y-o-y, up from 17.9% y-o-y in July. There was also a 35.2% y-o-y surge in imports, which reduced China’s trade surplus to US$20 billion in August from US$28.7 billion in July, and this indicates that China’s domestic demand could be rebounding after a few months of slowdown. Nonetheless, the level of the trade surplus still remained high enough for US to keep political pressure on the Chinese government over its exchange rate policy, as the Renmimbi had only increased by just 1.7% since the Chinese government abandoned the dollar peg in June this year.

On the local front, hogging the headline news is the Ringgit liberalisation measures by Bank Negara Malaysia along with a recent comment by Malaysia’s Prime Minister, Datuk Seri Najib Razak that the government was open to allowing Ringgit to trade offshore. Some of the measures taken by BNM to liberalise the Ringgit includes allowing the settlement of Ringgit for international trade, allowing Ringgit to be traded onshore in Shanghai, and also establishing a 3-year RM40 billion currency swap by Bank Negara with the People’s Bank of China. These liberalisation moves were certainly favoured by foreign investors, judging by the recent surge in foreign participation in KLSE trading and also foreign holdings in Malaysia Government Bond.

Besides that, the Malaysian government, through PEMANDU, has also conducted an Open Day and unveiled further details on the Economic Transformation Programme (ETP) on 21 September 2010. Briefly, the ETP will have 12 National Key Economic Area (NKEA) projects that will be the primary drivers to achieve GDP growth of at least 6% per annum over the next 10 years. This will result in the achievement of a developed nation status by 2020 with gross national income (GNI) per capita of at least US$15,000. These NKEA projects will contribute 73% of GNI by 2020 and are expected to require a total investment of US$444 billion. PEMANDU expects about 92% of the total funding for these projects to largely come from the private sector.

On the corporate scene, there has been a lot of recent news regarding merger and acquisition. In the insurance sector, Jerneh Asia (80%) and Paramount (20%) have disposed off their combined stake in unlisted subsidiary, Jerneh Insurance Bhd, to ACE INA International Holdings (ACE INA) for a total consideration of RM654 million cash. This would compliment ACE INA currently 51%-owned subsidiary in Malaysia, ACE Synergy Insurance Bhd, which is a general insurer and re-insurer. Over to the banking sector, it is reported that there could be a merger between RHB Capital and another local bank, but this news is denied by EPF. EPF holds a 55% stake in RHB Capital, and is required to pare it down to 35% due to restrictions by the banking and financial institution regulations. And lastly, despite earlier reports on a possible merger with Perodua and also a plan to make DRB-Hicom an equity partner, Proton has recently come out to the news and announced that they have no plans to merge with other companies at this juncture.

The 2Q 2010 results season which came to an end in August was broadly above expectations, driven by the strong performance of the banking sectors and other few companies such as Genting and Axiata. We expect Malaysia corporate earnings growth to continue to be strong, bringing this year corporate earnings back to pre-crisis high in 2007, and reaching a new record high in 2011. As a result of the record high corporate earnings, we think that the KLCI will reach 1,670 points within the next 2 years based on historical fair market PE of 15.5x. Coupled with the inflow of foreign funds in anticipation of Ringgit appreciation, investors could expect reasonable and attractive returns from investing into our local equity market now.

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