The global economy is gradually emerging from a severe downturn, with many countries showing more signs of recovery. This is reflected in the Malaysian economy as well, which is on track to recover to positive growth from 4Q 2009. In tandem with the improvement in the economy, corporate earnings contraction is likely to have passed the trough and are on the path to recovery. The normalised net EPS for the FBM KLCI stocks under our coverage is projected to bounce back sharply to +13.9% in 2010, from -16.9% estimated for 2009.
The market, however, has factored in the improvement in the global and local economy. Some pullbacks may occur from time to time, but pent-up demand and the existence of ample liquidity mean that the market is still likely to surprise on the upside, in our view. Our end-2009 FBM KLCI target remains unchanged at 1,260 or 16x 2010 earnings. Key events in the 4Q include the implementation of a new National Automotive Policy, the announcement of 2010 Budget on 23 October, potential share placements and paring down of equity stakes of GLCs by GLICs, and the relisting of Maxis.
Looking into 2010, we believe inflation/asset reflation would gradually emerge as a catalyst for greater market performance given the existence of ample liquidity with prolonged low interest rates, prospects of a further weakening in the US dollar as well as rising commodity prices. However, the potential risk of countries implementing “exit strategies” or policy tightening implies greater volatility in world financial markets. Based on the mid-cycle 15x 2011 earnings, our FBM KLCI target for end-2010 comes out to be 1,345.
We believe it is time to rebalance portfolios and prepare for greater market volatility in the months ahead. Meanwhile, look for Alpha+ stocks to outperform the market in an environment where we expect to see more corporate restructuring and M&A activities. We would also look into distressed stocks which are poised to come back as we believe these represent multi-year opportunity that is likely to be rewarding as the economic recovery gathers pace.
