By PAULINE NG
IN KUALA LUMPUR
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WITH most of the good news already factored in, Standard & Poor's (S&P) expects the second half of the year to be more challenging for Malaysia's equity market.
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| Looking up: S&P has raised its year-end KLCI target to 1,150 from 1,100 - 7% up from last Friday's close |
Even so, it believes the worst of the recession is past, with the first quarter having copped the brunt of it. Moreover, Asia (including Malaysia) is not as badly affected as the US - and compared to the Asian financial crisis, it's 'not nearly as bad'.
Economic recovery is expected to be gradual albeit slow in the coming quarters, said S&P's Asian Equity Research unit, which has lowered Malaysia's growth forecast for the year to a contraction of 3.3-3.5 per cent. Its estimate is nonetheless better than the official projection of a contraction of up to 5 per cent.
Because 'the easy money gains may be over', it has seen fit to only marginally raise its year-end target for the benchmark Kuala Lumpur Composite Index (KLCI) to 1,150 from 1,100. This implies a 7 per cent upside over last Friday's close of 1,076 points.
S&P is more positive of equities over the middle- long term; its year-end target for 2010 is 1,300 points.
According to its vice-president and head of Asia equity research, Lorraine Tan, key risks include higher-than-expected inflation owing to a weak US dollar and excess liquidity, as well as weaker-than-expected global economic recovery.
S&P does not see economic fundamentals as supporting current oil prices of over US$70 per barrel, and expects prices to average US$56 this year, and US$63 next year. It pegged the equilibrium at US$70-75.
The banks top its list of preferred sectors, and although it expects an uptick in non-performing loans in the second half, it's satisfied that asset quality remains firm with net NPLs at 2.2 per cent as at end- April.
In general, it maintains a preference for companies that are either adequately capitalised, have positive cash flow, and have a low risk of undergoing a capital-raising exercise.
The broader market is now trading at about 13 times earnings (about 16 times for the KLCI) - a level seen as reasonably attractive. Although the KLCI has gained 24 per cent in the year to June, it continues to lag other markets. Prior to the equities crash, however, the Kuala Lumpur bourse had not seen the huge jumps enjoyed by its peers.
Ms Tan indicated political uncertainties may have hindered gains, and that should the national focus return to the economy, 'the interest would come back'.
Foreign buying is evident in the recent rise in volumes, and with markets being so sentiment-driven, much is being made of Prime Minister Najib Razak's address to a conference of investors tomorrow.
He has alluded to more 'market-friendly' policies, which analysts take to mean greater liberalisation of the services and the overall economy.
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