EVEN as the US market retraced from its July rally, global markets were generally lacklustre in August as economic data announced turned uncertain. In Asia, markets put in a weak performance with only Thailand, Indonesia and Malaysia shining through. In line with our strategy of "sell small and buy big" in August, the KLCI did indeed rally some 60 points, with big caps including gaming, banks and telcos performing well while small caps languished as investors took profit on their earlier run.
For this month, we expect the market to continue its uptrend although we note the rather limited upside to our year-end target of 1,465 points, which we will review in our second-quarter results report card. The reason for our optimism is three-pronged. We continue to see strength in the ringgit, which may continue to attract foreign interest.
The Economic Transformation Programme (ETP) to be unveiled this month may garner further confidence on the government's economic reforms. Finally, we note that some local institutional investors have been taking profit on the market since its low in May. As the market has appreciated some 170 points since then, we believe that the current strength in the market will mean these investors would have to return to the market to avoid underperforming the KLCI for their index-linked funds. All three factors lead us to forecast a still positive September.
Top buys still big caps
Three of our top five buys in August outperformed the index, with the exception of smaller caps Supermax Corporation Bhd and KPJ Healthcare Bhd. For September, we maintain our big-cap buys of CIMB Group Holdings Bhd, Malayan Banking Bhd and Axiata Group Bhd and add in Tenaga Nasional Bhd, which has announced a bonus issue. We also add S P Setia Bhd, our top property sector buy, as one of our top picks for the month. Our target price for S P Setia reflects an upcoming upgrade on the sector, which will be released shortly.
In August, the KLCI put in an out-of-character performance, finishing as the second-best performer in terms of total returns in Asia, and losing out only to the Stock Exchange of Thailand.
This has allowed Malaysia to maintain its position as the fourth-best performer in Asia although our lead over fifth-placed Singapore has now extended considerably. The excellent performance in August was driven by fundamentals, including an excellent season of results announced by blue chips, including the banks, Genting and Axiata.
Also driving our market was a stronger ringgit as the Chinese government's decision to begin trading the yuan with the ringgit helped make our currency a proxy to the possible strengthening of the yuan, thus drawing foreign interest to our blue chips.
August was marked by a number of merger and acquisition announcements, including Prudential in talks to buy a stake in local insurer Pacific & Orient Bhd, Affin Bank Bhd proposing to buy a 21% stake in Indonesia's Bank Ina Perdana, and rumours of oil and gas (O&G) company Eastern Pacific Industrial Corporation Bhd being taken private.
Also, Berjaya Corporation Bhd was in talks with Singapore's Kim Eng to dispose of its stake in Inter-Pacific Securities while QL Resources Bhd announced it was buying a 23.3% stake in egg producer Lay Hong Bhd.
There were also the announcements of Singaporean Peter Lim buying a 29% stake in TMC Life Sciences Bhd and Fraser & Neave Holdings Bhd taking a 23% stake in Cocoaland Holdings Bhd.
Within the FBM100 in the month of August, aside from Tanjong Plc which soared on the privatisation offer from its major shareholder, good results helped to drive up blue chips such as Genting, AirAsia Bhd and Maybank.
On the flipside, expectations of weaker earnings led to a drop in JCY International Bhd while actual reported poor earnings caused O&G counter Wah Seong Corporation Bhd and the glove counters to fall. Mudajaya Group Bhd saw a sharp selldown as the circulation of a poison-pen letter stoked investor fears.
While we had actually advised to hold small caps and buy big caps as we felt that attention would shift to the big caps with an excellent results season, the literal interpretation of our "buy big, sell small" report title would have proven more correct as there was a selldown on some small-cap counters while big caps shone, with banks, gaming and telcos all soaring while the defensive smaller consumer plays that had run up a lot in June/July languished instead.
As usual, during the results reporting season, changes to our calls are more common. Upgrades included many among the transportation sector including AirAsia, MAS and Malaysia Airports Holdings Bhd as we switched analysts while at the same time discontinued coverage on some of the consumer stocks, also due to a change in our research team as well as low liquidity in some of the counters.
Outlook: Local support may help sustain market rally
For August, our call to buy big and sell small as the results season would shift investors attention back to big caps turned out to be correct. Not only did the results of Genting and the banks come in above expectations, the stronger ringgit against the US dollar — which reached a low of RM3.13 — also helped attract foreign money back to the Malaysian market. At the same time, profit taking on smaller caps was rife as earnings were generally in line for these counters.
While Bank Negara Malaysia (BNM) has raised the overnight policy rate (OPR) three times this year in March, May and July, our OSK/DMG Economics Research team still sees a further 25 basis points hike in the OPR in 2010 to 3%.
While this has a chance of happening in September, it could also come at a later policy meeting. This may help propel the ringgit to a slightly higher level against the US dollar and attract a further inflow of foreign investors.
Other than a stronger ringgit, details of the government's economic reform strategy will be unveiled during the Economic Transformation Programme (ETP) open day on Sept 21 which will be organised by Pemandu.
The open day will allow Pemandu to share the results of the National Key Economic Areas (NKEA) labs that it had run over the past two months in order to solicit more feedback from the public before presenting a proposal to the government.
Among the more juicy bits of detail we expect are the proposed route of the KL Mass Rapid Transit system and the result of its feasibility study which should be completed on Sept 10 well as the plans for the Rubber Research Institute land in Sungai Buloh. This may help spur greater confidence in the government's reform actions.
Another possible reason for a continued upward bias in September could be renewed buying from local institutional investors. We believe that a number of local institutions had been taking profit as the market rallied from its low in May. Some of this selling could be related to having to pay dividends based on a June 30 close or linked to efforts to diversify their portfolio outside Malaysia.
Nonetheless, given that the market has rallied some 60 points in August alone and some 170 points from its low in May, we believe that for local funds that benchmark themselves against the KLCI, it will be crucial to jump back into the market at this point of time otherwise their performance may lag that of the composite index.
As an example of the recent actions by local funds, we take a look at some of the buying and selling done by the Employees Provident Fund (EPF). Based on the substantial shareholder changes filed on Bursa Malaysia on some 19 bigger-cap companies, we note that there was a general trend of profit taking on Malaysian stocks from the end of May which intensified in August.
While we have not captured all the EPF shareholding changes, our aim is only to indicate the overall trend among the bigger caps. We believe that this trend is also generally reflective of the other local institutions as well.
As such, we believe that should the KLCI manage to hold at its current level due to continued foreign buying as the ringgit remains strong, local institutions will also turn net buyers of the bigger caps, especially given the uncertainty in overseas markets.
As such, given that we expect foreign interest to remain strong in Malaysia, more details on economic reform and potential support from local funds, we remain positive on the month of September. We continue to prefer the bigger-cap companies even after their run in August as we see foreign interest focusing on the big caps while smaller caps may have to wait another month before interest trickles back into the laggards.
At the same time, with more details of the Greater KL NKEA possibly being unveiled during the ETP open day, we do not discount the possibility of there being more interest on the infrastructure trading ideas of Malaysian Resources Corporation Bhd, MMC Corporation Bhd and UEM Land Holdings Bhd, also in September.
While we see volume being low in the week ahead of and after Hari Raya, this should not disrupt the upward momentum of the market.
OSK's top picks outperformed the market by market weight
For August, with the market taking literal heed to our "sell small, buy big" call, our smaller-cap picks languished.
Supermax was brought low by a sudden bout of risk aversion to the rubber glove counters as their results were not sterling while interest in KPJ Healthcare waned after the conclusion of the Khazanah-Parkway saga.
However, our bigger-cap top buys of CIMB, Maybank and Axiata all put in a sterling performance and outperformed the KLCI.
For September, we keep our focus on big caps and drop our smaller-cap picks of Supermax and KPJ. We maintain Maybank, CIMB and Axiata and add TNB, which has announced a one-for-four bonus issue and is also a big-cap laggard. We also add S P Setia, which is our top buy in the property sector.
This article appeared in The Edge Financial Daily on Sept 2.
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