KLCI - Sell On Rally

FBM KLCI to Succumb to Minor Profit Taking 

 

The Malaysian stock market bounced back last week, aided by the US$1 trillion (RM3.2 trillion) European Union/International Monetary Fund package to contain the eurozone debt crisis, but gains were checked by the revelation of near RM1 billion in loss provisions by Sime Darby which overshadowed the better-than-expected first quarter gross domestic product growth and Overnight Policy Rate increase announced by Bank Negara Malaysia.

Week-on-week, the blue chip barometer, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI), recouped 6.41 points or 0.48 per cent to close at 1,339.30, with gains in Maybank (+17 sen), CIMB (+22 sen) and Genting Bhd (+23 sen) contributing to all of the index's rise. Average daily trading volume dwindled to a seven-week low 768.4 million shares with average value of RM1.14 billion, from 847.5 million shares and RM1.4 billion in the previous week.

Cautious Mood Prevailed Despite Positive News Flows  
The excitement in global financial markets early last week, induced by the EU and the IMF's combined rescue package of Euro750 million faded quite quickly the following day. A major concern is the ability of eurozone to sustain economic growth amid drastic austerity measures, which in essence will erode the full impact of the aid. China's property bubble and rising inflation compounded worries that any government intervention to cool the economy could affect its ability to support world economic growth and cushion any slowdown from the Western economies.

Locally, the news flows were mixed. The strong first-quarter GDP growth of 10.1% year-on-year ascertained Bank Negara's view of normalising the OPR by raising it another 25 basis points to 2.5%. The higher-than-expected growth did not excite the market as it was hit by Sime Darby's confession about higher-than-expected cost overruns. The market mood was sombre that even Maybank's better-than-expected results for the first nine months of 2010 did not help to cushion the fall. 

 

Banks Reporting Better-than-Expected Earnings
Last Friday, AMMB (buy, target price RM5.80) released its fiscal year 2010 results. The net profit of RM1 billion came better than consensus expectations. Then, CIMB (buy, target price RM16.30) announced its plan to acquire Khazanah's 19.7 per cent stake in PT Bank CIMB Niaga for close to RM2 billion. It makes sense on Khazanah's part to streamline the shareholding, which is held through its wholly-owned subsidiary, Santubong Ventures, as it also owns a 28.4 per cent stake in CIMB currently. It is unclear whether it will take CIMB Niaga private after holding almost 98 per cent of the subsidiary but this exercise could be a prelude to CIMB's planned dual listing exercise on the Indonesian exchange. 

 

A clear conclusion from the  ongoing earnings reporting season so far is that banks are turning the corner with better-than-expected earnings and the high likelihood of them sustaining it on the back of the rising OPR. Normalisation of the benchmark interest rate is not expected to dent loan growth visibly until it surpasses 3.5% based on signs of robust economic expansion ahead. 

On the US front, consensus figures on housing starts and building permits are pointing towards continued improvement and the minutes of the Federal Open Market Committee meeting that will be released on Thursday could be supportive of the current monetary stance for an extended period. While these news flows could reduce market volatility and help the FBM KLCI to regain some points this week, investors should exercise caution and sell into any rally. Equity markets around the globe are expected to remain volatile as the dust has not settled in the eurozone.

 

by TA securities