Malaysia Stock Market Strategy 2011 by MIB
2011-YE KLCI target: 1,710
Positives dominate. We expect Malaysian equities to scale new highs in 2011 supported by: (i) liquidity flows as funds continue to move into emerging markets, courtesy of the US’ 2nd dose of quantitative easing (QE2), (ii) the growing possibility of an early general election (GE), (iii) domestic investment upcycle from direct investments and the Economic Transformation Programme (ETP) implementation, and (iv) corporate exercises – M&As, privatisations and GLIC divestments – helped by low interest rates and ample liquidity.
Set for a re-rating. PM Najib’s 21 months in office (since 3 Apr 2009) has seen major changes being introduced, reminiscence of what his father, “Malaysia’s Father of Development”, had accomplished as the 2nd PM. The move to a high-income economy, though late by a decade, will now have to be fast-tracked, with greater resolve. The engagement of businesses and rakyat in drawing up the ETP was unprecedented. 2011 will be the year of “walking the talk”. We believe market will re-rate up gradually as the ETP delivers the results in accelerating growth.
2011-YE KLCI target of 1,710 pts. We introduce a 1,710-pt YE target based on a one-year forward market earnings multiple of 15.5x, and supported by our projection for a 13.5% growth in corporate earnings for KLCI 30 stocks in 2011 and a 9.1% growth in 2012. We expect a strong 1H2011, buoyed by fund flows from US’ QE2, and expectations of an early GE. The market has traded at above 18x forward earnings in early-2008 when fund inflow was strong, coupled with the 12th GE. Technically, at 18x forward earnings, the KLCI would breach 1,800 pts.
Risks to our projection. We expect volatility to persist as recovery in the developed economies will most likely take longer than expected. Eurozone’s sovereign worthiness has overtaken the US economy as our main concern. The other risks are China’s economic growth sustainability, regional interest rate upturn, and the imposition of capital controls in Asia. Geo-political tensions in North Asia – at the Korean peninsula and Japan-China – will persist into 2011. In Malaysia, policy flip-flops and implementation delays of the ETP are the main risks.
Thematic plays dominate. Our picks are predicated on: (i) news-flow in infrastructure spending and real estate developments on government lands, which will be the most visible ETP implementation involving Greater KL, (ii) politics (13th GE), including the Sarawak state elections (due by July 2011), (iii) M&As, privatisations and GLIC divestments, the latter with a Chinese QDII angle, (iv) PETRONAS-driven capex, and (v) values still in the aviation sector as it enters the 4th year of the industry cycle – a period known for strong profit growth and margin expansion.
Market strategy. We overweight banks, construction, property, building materials, oil & gas and aviation sectors, in line with our thematic anticipation. Plantations (neutral) will remain a momentum play to any weakness in the US dollar as valuations are reflective of fundamentals. We would reduce weightage on high beta stocks towards mid-2011 as QE2 runs its course. From the dividend angle, we continue to favour selective non-office REITs.
2011 outlook: Higher and volatile
YE KLCI target of 1,710 pts. Our new YE KLCI target is based on a one-year forward market earnings multiple of 15.5x, supported by ourprojection for a 13.5% growth in earnings for KLCI 30 stocks in 2011and a 9.1% growth in 2012. The 15.5x target is within the: (i) 16x one
standard deviation above the 14.4x historical mean since 2000; and (ii) the KLCI’s one-year forward multiple of 14.9x as at 16 Dec 2010. On P/B (historical) valuation, our YE target translates into 2.5x, versus 2.4x as at 16 Dec 2010. Our bottom-up approach (based on our target prices for KLCI 30 stocks) derives a 1,680 pt for YE 2011.
Chasing liquidity in first half. We expect strong equities momentum in 1H due to: (i) liquidity flows from US’ USD600b QE2, coupled with (ii) expectations of an early GE. QE2 started in Nov 2010 and ends in Jun 2011, with USD114b of US Treasuries bought as at mid-Dec 2010. US’ monetary policy stimulus is supportive of fund outflows seeking alpha returns. On the domestic front, signs of an early GE (not due until May 2013) includes a perceived fragmented opposition front, a nationwide tour by PM Najib and his deputy Muhyiddin from January to woo support from the “grey areas”, and the postponement of UMNO’s party
elections by 18 months (originally slated to begin with the branches election in Mar 2011 culminating into the party’s election by 4Q2011).
Market could cross 1,800 pts, technically. The liquidity inflow-GE combination which we anticipate in 1H2011, will not be dissimilar to the early-2008 situation where the KLCI had traded above 18x forward earnings on USD303m total equity fund inflows in Jan-Feb 2008, and just before the 8 Mar 2008 GE. The market picked up pace then, after a strong earnings growth in 2007, where KLCI corporate earnings grew 28% YoY. Using the early-2008 market momentum as a guide, the KLCI 30 could cross 1,800 pts at 18x forward earnings. Our analyses on past GE trends are detailed in the latter half of this write-up.
Volatility to persist throughout. We expect the market to consolidate towards mid-2011, after gains since Jun 2010. Market will stay volatile throughout 2011 as global issues will persist. Concerns on the US will be cushioned by Obama’s tax-cut deal, expected to be approved by
early-2011. The larger worries are however on Eurozone’s sovereign worthiness: (i) the growing maturity of government debt profiles, and (ii) the knock-on impact on the European banks which are the major source of funds to the government. Geo-political tensions at the Korean peninsula will create “tension” in the markets. Occasional territorial disputes in North-East Asia will also add to global markets’ volatility.
Other external headwinds. China’s economic growth sustainability, interest rate upturn, and the imposition of capital controls in Asia are the other risks closer to home in 2011. Inflationary pressure will mount in China due to its fast growing economy; this may trigger interest rate hikes, which would drive capital inflows and appreciation of the yuan. Besides China, rising interest rates in the other emerging economies will draw capital flows from Malaysian equities. Except for Malaysia and Philippines, real interest rates have already moved into the negative zone in the other Asian economies. Capital control in any part of Asia to battle excess liquidity inflows will be negative for sentiment.
But, Malaysia will be well buffered. Amid the external uncertainties, we expect Malaysian equities to be sufficiently cushioned against a major downside, by its domestic economic resilience, a strong banking system, and proactive monetary policies. We expect the Malaysian economy to grow by 5.5% in 2011, and the overnight policy rate (OPR) to be unchanged in 1H, which will support growth. Being a domestic-driven economy, with largely domestic-focused equities, and an appealing step-up growth potential from the ETP, Malaysia will continue to appeal to the long funds or bottom-up investors. Corporate earnings growth. We expect corporate earnings growth momentum to continue, but on a relatively slower +15.8% in 2011 due to a high base in 2010 (+32.8%), and +9.3% in 2012. These are derived from our research universe which makes up 63% of Bursa’s market value. Our 2011 15.8% earnings growth forecast is driven by all sectors except utilities as a meaningful tariff hike will remain elusive for Tenaga amid rising fuel costs. Our 2012 growth forecast has upside potential from further ETP implementations benefiting the banks, with a
positive knock-on impact on the other sectors.
Domestic key drivers for 2011. Besides the anticipation of an early GE, we identify the following domestic drivers for Malaysian equities in 2011: (i) news-flow in infrastructure spending and government land developments, (ii) corporate exercises nd GLIC divestments, and (iii) PETRONAS-driven capex. This will benefit the construction, property, building material, media and oil & gas players. We are also positive on the banks, being a beneficiary of RM1.288tr worth of private sector investments identified under the ETP (2010-20). The consumer sector will gain from an expanding economic pie and a gradual roll-back of government subsidies. We overweight these sectors.
Other sector outlook. Plantations (neutral) will stay a momentum play to any weakness in the US dollar. We forecast RM3,000/t CPO ASP in 2011 (11M2010: RM2,670/t), while sector valuations are reflective of a RM2,800-RM2,900/t ASP. We overweight aviation with values still as the industry enters the 4th year of a 5-year cycle in global air travel. We are underweight on utilities, as Tenaga’s wait for a tariff hike will take a back seat given the government’s other priorities.
by Maybank Investment Bank