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The Top Markets For 2010 – So What’s Next For 2011?
Malaysia Perspective | 07 February 2011


2010 had been a good year for most investors as most equity markets extended 2009’s spectacular rally to end the year at higher levels. With emerging markets leading global growth, particularly the Asia excluding Japan economies, they turned out to be the forerunners. Among these emerging markets, the ASEAN markets such as Indonesia, Malaysia and Thailand did particularly well, delivering strong returns for investors.

On the other side of the globe, plagued by ongoing sovereign debt problems, it was not surprising that the European equity market was under tremendous pressure. Similarly, the tightening measures adopted by the Chinese government throughout 2010 exerted downward pressure on the Chinese equity market. As a result, both China and Europe were the laggards in 2010.

Let us take a closer look at the key factors that provided the support or pressure to the top three (Thailand, Indonesia and Malaysia) and bottom two (Europe and China) performing markets.

Market Performance
Table 1: Market Performance

Top performing markets


The Thailand equity market had a stellar performance as the index rose 41.0% (in local currency) in 2010 to close at 1032.76. While not at its record high levels, the SET index posted a 10-year (post 1997 Asia financial crisis) high of 1047.79 on 8 November 2010. With the MYR being one of the stronger performing currencies, an appreciation of 0.8% against the THB slightly lowered local investors’ total returns, but yet the SET Index came in as the top performing market with a 40.1% gain in MYR terms.

As the global recovery found firmer ground, external demand for Thailand’s produce remained strong. In fact, Thailand enjoyed a year of robust growth led by strong exports, which appeared to be relatively unaffected by the strong THB. This prompted the Bank of Thailand to revise higher growth expectations for 2010 higher on several occasions, with the latest projection for 2010 growth at 7.3%.

While developed nations continue to focus on boosting growth, the Bank of Thailand had their hands tied managing inflationary pressure. Inflation has been trending upwards in 2010 and will likely continue to trend higher in 2011. Meanwhile, Thailand is expected to expand further in 2011, albeit at a slower pace compared to 2010 and against fellow peers, adding to the risk of a faster-than-expected pace of inflation. According to IMF’s latest 2011 GDP projections, Thailand is expected to be one of the slower growing Asian economies, though still at a faster pace than developed nations.


As represented by the JCI Index, the Indonesia equity market gained 38.1% in 2010 (in MYR terms) and turned out to be one of the top performing markets for the two consecutive years of 2009 and 2010.

On the economic front, the Indonesian economic growth remained strong with GDP expanding by 5.69%, 6.19% and 5.80% year-on-year respectively in the 1Q, 2Q and 3Q2010. Due to the low contribution of net exports to GDP (only 10% of GDP), the growth of this domestically demand driven Indonesian economy has been somewhat sheltered from the slowdown in global demand. Domestic consumption, which contributed around 60% to GDP, stayed strong and remains supportive towards economic growth in Indonesia, expanding year-on-year from 3.92% in 1Q 2010 to 5.16% in 3Q 2010.

While the economic outlook for Indonesia remains positive in 2011, investors should nevertheless be cautious that a sudden reversal of foreign funds flow could lead to a sharp correction in the market, as foreign funds have become the key driver for the rise in the Indonesian equity market. This, in our view, remains the key risk of investing in the Indonesian equity market.

On the other hand, with 3,660 and 4,230 points as our target level for 2011 and 2012, the Indonesian equity market has the lowest upside potential among the 19 markets under our coverage. In addition, our research team found that markets which have performed strongly for two consecutive years have a higher chance to be one of the worst performing markets in the following year, and this is the case for Indonesia now. With Indonesia trading at 15.2X 2011 forward PE (as at 31 December 2010), which is on the same level as its fair PE of 15X, coupled with the current high base effect, we believe that the Indonesian equity market might lack the momentum to grow as strong as the past two years. In fact, there is a high possibility that Indonesia may turn out to be one of the worst performing markets in 2011. As such, we have recently downgraded Indonesia’s equity market from 3 stars – “Attractive” to 2.5 stars – “Neutral”.


The Malaysia equity market surged 19.3% (in MYR terms) in 2010, allowing Malaysia to be ranked third on our top performing markets list. In addition, the FBM KLCI surpassed its pre-crisis record highs of 1,524 points on 9 November 2010, mainly driven by the rise in the plantations, financial and telecommunications sectors.

On the economic front, Malaysia’s economic growth slowed down to 5.3% year-on-year in 3Q 2010 after surging 10.1% year-on-year in 1Q2010. As Malaysia is an export-oriented economy particularly involving electrical and electronic goods, the current slowdown in global demand has somewhat dampened its economic growth. Going forward, we expect the global recovery to be sustainable and global demand to rebound. Hence, we expect exports growth to moderate in 2011. Furthermore, as most of the development projects under the Economic Transformation Programme are unfolding in 2011, we believe this will propel corporate earnings growth in Malaysia which should lead to further upward revision of estimated earnings.

The Malaysia equity market remains attractive with 2011 and 2012 forward PE at 14.4X and 12.9X respectively, which is still below its historical fair PE of 16X. Corporate earnings growth has been revised higher from 11.9% and 9.1% to 12.9% and 11.3% for 2011 and 2012 respectively (as at 30 December 2010) due to the listing of several major IPO’s such as Petronas Chemicals Group Bhd on Bursa Malaysia. Consequently, we also revised our target level for 2011 and 2012 from 1,640 points and 1,800 points to 1,700 points and 1,900 points respectively. Overall, we maintain a 3.5 stars “Attractive” rating for Malaysia equity market.

Bottom performing markets


Although we have assigned 4.5 stars to the China market, it has turned out to be one of the worst performing markets amongst our research coverage. Represented by HSML100 Index, the China market fell by 9.3% in MYR terms. Policy risks include those that required Chinese banks to beef up their required reserves capital, stricter property measures, various tightening moves plus escalating inflation have depressed the equity market. This is a sharp contrast against the nation’s robust economic and corporate developments.

On the economic front, the China growth story remains compelling. The world second largest economy expanded 11.9%, 10.3% and 9.6% year-on-year respectively in the first three quarter of 2010 and remains one of the world’s fastest growing economies in spite of its huge size. Moreover, exports which have long been China’s economic growth driver, have made a solid comeback. Exports for the first 11 months of 2010 jumped 33% year-on-year and are expected to hit a record high of USD 1.5 trillion in 2010.

On the other hand, earnings for Chinese companies remain robust and are expected to hit record highs. Consensus earnings are expected to grow at 15% CAGR over the next two years. At present, none of the key risks materialised in 2010. The flattish equity prices have driven down the valuations to a multi-year low level, which provided a very good entry point for long-term investors.

Apart from the attractive valuation, buying China is a simple way to reap the benefit of the potential RMB revaluation. This is because Chinese companies’ assets will be re-valued on a rising RMB and their corporate earnings will be adjusted higher when they are translated into foreign currencies.

We think policy risks will remain high in 2011. However, 2011 will be the first year of the 12th Five-Year Plan – a strategic plan laying out China’s key developments for the next five years. Under this backdrop, we think economic growth and corporate earnings will be sustained. In fact, even though earnings are likely to normalise in 2011, the valuation for the China market remains attractive. As such, we maintain 4.5 stars – “very attractive” on the China market, with a three-year investment horizon.


The European equity market gained 8.6% in 2010 (in local currency terms) as the region surprised consensus to grow at a stronger-than-expected pace in 2010. In fact, this stronger-than-expected growth prompted analysts to continually revise estimated earnings for the Stoxx 600 index higher. Compared to the start of 2010, estimated earnings for 2010 was revised higher by 14.3% while estimated earnings for 2011 and 2012 were revised higher by 7.7% and 7.2% respectively, an indication of improving sentiments over the span of 2010.

However, despite the decent performance (in local currency terms), Europe (Stoxx 600 index) was one of the worst performing equity markets in 2010 for most investors. This is because the EUR fell sharply against major currencies, resulting in foreign exchange losses for investors. As early as 4Q2009, there were warning signals that Greece was facing solvency problems and may default in their sovereign debts repayment. The issue escalated in early 2010, dampening investors’ sentiment and subsequently led to the first major correction for 2010. The weakened sentiments have also led to the sharp fall of EUR against other major currencies. The fall of the EUR bottomed out in June 2010 and has been picking up gradually thereafter. However, the EUR still ended 2010 significantly lower against most other currencies. The EUR fell 17.3% against the MYR by the end of 2010, eroding the equity returns for local investors as the Stoxx 600 index fell by 9.8% in MYR terms.

Moving forward

In 2010, our picks for favourite regional market (global emerging markets) and favourite single country (South Korea) were decent. Global emerging markets represented by MSCI Emerging Market index gained 16.4% in local currency terms which translated to 3.5% in MYR terms. It only trails MSCI Asia ex-Japan by a fine margin and both of them were the best performing regional markets in 2010. Similarly, South Korea, while not making the top three market list, was among the top performing single country markets. KOSPI gained 21.9% in local currency and 13.1% in MYR terms.

As we move ahead to 2011, we still favour equities over bonds and believe that there is still room for strong equity market performances ahead.

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