Monday, October 05, 2009

Timely Boost For Market?

IN the past three decades of the Kuala Lumpur Composite Index’s (KLCI) memory, the third quarter of the year had typically been the weakest. That is why some investors shun the market from August right up to October (Black October, remember?).

Maybank Investment Bank senior manager, head of retail research equity markets Lee Cheng Hooi has proof to substantiate that. “Month-on-month (MoM) returns from 1977 to 2009 show that the months with the highest risk are the worst performing. Based on over 32 years of observations on MoM returns, we have identified a common trend for the FBM KLCI index as well as the Dow and Hang Seng indices. All three markets are weak in the August to October months,” says Lee.

For that reason, Lee recommends investors to “Sell” over this period and “Buy” in December. He expects the market to remain volatile as it is still in the “very high risk” zones.

A potential catalyst (or not) could be the upcoming budget 2010 which to be tabled in parliament on Oct 23. Do pre and post budget market swings present an investment opportunity?

Positioning for upside
Based on the past five years, the stock market tends to show a slight downward dip in the aftermath of the budget as investors generally have high expectations, and as such, end up getting somewhat disappointed over the lack of goodies.

But as this will be Prime Minister Datuk Seri Najib Tun Razak’s first budget as he is also the Finance Minister, don’t be surprised to see market-friendly measures, despite the Government saying it is looking to reduce operating expenditure while maintaining fiscal discipline.

Important to note too, is that compared to the regional bourses on a year to date basis, the FBM KLCI remains the second worst performer at 40.7%, only ahead of Japan.

TA Securities senior technical chartist Stephen Soo says that October has been touted as a negative month, more so because many of the global negative events in the past, took place during these months. “Without these negative events, it’s actually quite a random trend,” he says.

But there’s opportunity in crisis.

JF Apex Securities Bhd chief operating officer Lim Teck Seng is prepping himself for more upside as he expects more liberalisation and investor-friendly measures to come out of the budget.

He says the tone has already been set by Najib’s previous moves which includes the call to pare down Khazanah Nasional Bhd’s stakes in government-linked companies and bringing Maxis Communications Bhd back to the local bourse.

“There may be a pre-budget rally. The objective is simple. The market needs to move. Najib appears very serious in attracting foreign investments to the market,” he says.

KAF Securities research head Chehan Perera, in his strategy report dated Sept 30, expected the 2010 budget to be a follow-through of the expansionary policies announced in the past year, while continuing to focus on stimulating consumption.

“Structural adjustments to the composition of the government profit & loss are unlikely although the Prime Minister has hinted at a need to manage expenses more efficiently. Overall, the budget should be market friendly and provide a nice trigger ahead of the third quarter reporting season,” says Chehan.

Analysts also point out that the present correction may provide a good chance to buy quality stocks.

“Our markets have corrected ahead of the global market ... we had the Hungry Ghost Festival in September. So, the CI’s downside is limited. If you look at the second and third liners, there is hardly any correction,” says Lim, who believes the market is looking for a reason to move to the next level.

Potential catalysts from the upcoming budget may come wrapped in the form of bigger construction projects to be awarded including the extension of the light rail transit lines estimated at RM7bil and the new Low Cost Carrier Terminal.

Soo expects more of a post-budget rally, as he anticipates investors to accumulate on confirmation of news.

“The market is now correcting along with global markets. I would let the market dip a further 50 points before positioning myself for the year-end rally,” says Soo, who has a 1,250 target for end-2009.

A technical analyst says the short-term impact and direction of the budget on the economy and stock market are irrelevant. After all, market often reacts with knee-jerk speed and over-zealousness.

“The clever investor will think: Expectations are still pretty bearish. The green shoots everyone has been talking about may turn to to dead leaves. This year, everyone is still complaining about a recession, the lack of execution and political uncertainty. Maybe it’s a good time to buy,” says the technical analyst.

He says this bearish mood will hit good stocks with high dividend yields. Solid stocks will also be hit and be fleetingly cheap.

For example, consumer stocks with high dividends and reputable management such as AEON Co (M) Bhd, Nestle Holdings Bhd and Parkson Holdings Bhd will inevitably correct with the rest of the market.

Nonetheless, this does not change their growth rates.

“During recessions, people still buy toothpaste, coffee, biscuits, soaps or cleansers. This correction gives you a chance to pick up your favourite stock at a lower premium. It’s very unlikely that the budget will change their prospects,” he adds.

On this note, Lim likes food-based and consumer-based companies, as these companies tend to do well during recessions.

“Their profits may even double up, as consumers cut down on expensive food and alternate with cheaper foodstuff,” he says.

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