Monday, January 07, 2013

Tough To Forecast Stock Market Performance

Tough to forecast stock market performance but analysts see improvement in H2.

LIKE the years before, it is difficult to predict how the stock market will perform this year. Suffice to say, there will be volatility, as a mix of good and bad factors come together.
The world's second-largest economy, China, for example, is beginning to turn in some favourable data such as a rebounding gross domestic product (GDP) and corporate earnings growth along with low inflation.
The same goes for the United States. In its 2013 outlook report for its clients, Nomura Equity Research says expectations are for US growth to bottom in the first quarter but from this challenging starting point, as growth accelerates over 2013, it believes that equity prices should move up ahead of strengthening data. Amid these, the eurozone's long-running debt issues are still expected to rear their ugly heads.
Locally, the impending general election widely expected to be in the first quarter will obviously be on everyone's minds, likely causing the market to be a little choppy, given the uncertainties of its outcome.
However, according to analysts, this is likely to improve in the second half of the year amid improving global economic conditions even as investors set their sights back on fundamentals post-general election.
Economically, the Malaysian economy performed better than expected in 2012, aided by large multi-billion ringgit infrastructure as well as other projects rolled out under the Economic Transformation Programme.
The central bank expects the economy to grow by at least 5% this year, buoyed by continuous domestic demand. Meanwhile, after companies reported less-than-expected earnings last year, analysts have slashed their earnings targets for this year, suggesting that corporate earnings are not moving in line with the growing GDP.
The macro view
With economies and markets closely linked, the entire global economic backdrop serves as an important market performance indicator across all equity markets. In the world's two largest economies, it would appear that things are becoming more palatable.
The slowdown in China, Malaysia's biggest trading partner, appears to have bottomed out, says the World Bank in a report. Its economists expect China to release GDP growth data averaging 7.9% for the whole of 2012, which is still higher than the official government target of 7.5%. For this year, China's GDP is forecast to grow at a higher 8.3%, driven by higher investments and fiscal stimulus according to them.
Over in the United States, its economy beat expectations by growing at a faster rate of 3.1% in its latest quarter. That data came in amid encouraging numbers from the property market, which showed the pace of home sales increasing by 5.9%, the highest in three years.
Given such circumstances, UOB KayHian research head Vincent Khoo reckons that external concerns have somewhat diminished.
“Positively, concerns of contagion effects from Europe have waned and the United states has averted the fiscal cliff scenario,” Khoo says.
A fiscal cliff would have seen a simultaneous move to increase taxes as well as cut spending in order to reduce the US budget deficit, which could then have sent the world's largest economy back to recession.
Khoo adds that continuing quantitative easing, particularly by the United States and Japan, and optimism on a turnaround in China would continue to fuel a near-term liquidity-driven global market.
Meanwhile, in a recent poll by a unit of OCBC Bank, fund managers surveyed believe that the US Federal Reserve's third round of quantitative easing (QE3) and its pledge to keep interest rates ultra-low for an extended period of time, along with its intention to continue to buy mortgage bonds and Treasuries indefinitely until the US sees a resounding pick-up, will help buoy the world's largest economy.
Still, not all fund managers are positive, with some having a neutral view of what is to come this year, the poll reveals.
ING Investment Management, for one, describes the outlook for stock markets this year as “tepid”, saying that fundamental drivers in the developed economies have yet to be discovered.
Closer to home, the economy performed better than expected last year and is forecast to grow 5% this year, supported by private consumption and investment.
These will be fuelled by the multiple incentives announced in Budget 2013 as well as other factors, including a healthy labour market, steady income growth and an accommodative monetary policy.
Key economic risks remain in the rising levels of household debt, with household debt-to-GDP levels at 76.7% as at end-September 2012 versus 75.4% in the second quarter.
Household borrowing, meanwhile, has increased by about 12.5% annually in the last decade.
Outlook and strategies
Market experts are pretty much adopting the stance they did last year, remaining generally defensive amid expectations of volatility.
The 30-stock FTSE Bursa Malaysia KLCI (FBM KLCI) finished last year at 1,688.95 pointsgiving a total return of about 10.34%.
This compares with a marginal return in 2011.
RHB Research is advising its clients to stay defensive in the first half of this year, while taking advantage of market weakness during the period to buy into fundamentally robust stocks for “greater out-performance” in the second half.
Kenanga Research, meanwhile, will continue to adopt its trading stance, buying-on-weakness below the 1,610-point level and selling-on-strength above 1,710 points in a range-bound market environment.
UOB's Khoo says he expects the market to head for new highs this year post the election-consolidation period. UOB tentatively pegs its year-end target at 1,750 points based on around 13.8 times prospective price earnings, which has been consistent with the recent years' ending per earnings (PE) multiples. Khoo cautions that post-election, sentiment could be tempered by moderating economic growth amid slowing local consumption trends.
This would stem from the resumption of the previously-deferred energy and food subsidy reduction schedules, and the absence of pre-election fiscal packages.
Aberdeen Islamic Asset Management Sdn Bhd chief executive officer Abdul Jalil Abdul Rasheed notes that Malaysia's stock market is trading closer to 18 times PE now, making it increasingly difficult to find under-valued stocks.
“We are bottom-up stock picking investors,” he says of the fund's strategy.
Aberdeen has a total of US$4.4bil (RM13.46bil) invested in Malaysian equities across 32 stocks, making it one of the largest foreign institutional investors in the country. Its three largest local investments are in Public Bank BhdCIMB Group & Aeon Co (M) Bhd.
Nomura Equity Research says it is maintaining its base-case assumption that the ruling government would win by a majority.
“Thus, any weakness in the market would present a good buying opportunity.
“We are advocating a barbell strategy,” it notes in its 2013 market outlook report, saying that investors should position themselves adequately in the defensive sectors while starting to take on risk selectively ahead of the general election.
The banking group has raised its call to “overweight” from “neutral” for the telco sector and is maintaining its bullish stance on banks, construction, plantation, and oil and gas.
Sector-wise, Kenanga Research is generally bullish on banking, non-bank financial groups, oil and gas and power utility firms.
It is also optimistic on the consumer food and beverage sector as it believes that value has emerged following some recent price corrections.
UOB's Khoo advocates defensive sectors like airlines, telco and gaming this year, as well as the construction sector which he describes as a laggard.
Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew notes that foreigners were net buyers of Malaysian stocks towards the end of last year.
“A lot of foreign money got washed up on our shores but only into index-linked counters, the gains were not broad-based,” Pong says.
His pick for this year are the commodity companies which should attract higher demand for their products and services from the recovering world economies.



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