Analysts upbeat on Malaysian stocks

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However FBM KLCI looks vulnerable to a correction in short term

PETALING JAYA: The FTSE Bursa Malaysia KL Composite Index (FBM KLCI) may look vulnerable to a correction in the near term after surging 34% so far this year, but better earnings outlook and a projected return to economic growth next year will keep the uptrend intact in the longer term, say analysts.

“Although the urge is to turn more risk averse in the near term, we believe investors should position for better returns beyond the next two or three months,” RHB Research Institute said in a note to clients yesterday.

The firm expects positive economic “datapoints” in the fourth quarter and upward corporate earnings revision to keep the market’s long-term “uptrend” intact.

“We believe any market correction will be quite shallow,” it said.

Stocks in Shanghai closed marginally higher yesterday, as selling pressure subsided after the main index plunged more than 6% on Monday.

At current levels, equity measures in Shanghai and Shenzhen had tumbled more than 20% from peaks hit in early August, which fit analysts’ classic definition of a bear market.

The FBM KLCI fell 2.99 points yesterday to 1,171.28 in thin volume of 498 million shares worth less than RM1bil. The index hit a 14-month high of 1,188 points two weeks ago.

OSK Research said fears of greater anti-speculation controls in China had capped gains in Asian stock markets in recent weeks despite Wall Street advances.

“Going forward we see investors pulling out money from the region as valuations are significantly pricier compared with the US,” OSK Research said in its September strategy report published yesterday.

Despite its view of the FBM KLCI being “expensive,” OSK Research yesterday raised its call on local stocks to “neutral” from “sell into strength.” The firm also increased its target price for the FBM KLCI to 1,144 points and to 1,265 for 2010.

The brokerage’s year-end fair value was based on 14.5 times earnings for 2010, while next year’s target was derived by putting a higher multiple of 16 times of the same year earnings.

“For September, we tweak our focus more on lower liners with Axiata Group Bhd the only remaining large blue chip top pick,” OSK Research said.

At current levels, the FBM KLCI had risen 34% year to date and 40% from a low point in March.

While the leap lagged behind most emerging Asian equity rally in the past months, the valuations appeared to be at a premium compared with its peers.

At 15 times its 2010 earnings and 1.7 times book value, HwangDBS Vickers Research said the FBM KLCI was “vulnerable to a correction.”

“We believe there needs to be further evidence of stronger growth for a sustained upside beyond the current 15 times multiple in the near term,” the firm said.

Like OSK Research, stock picking is the “preferred strategy” at HwangDBS, which has a 2010 year-end target for the FBM KLCI of 1,240 points.

“Our picks are a combination of high-quality value, laggards and select small-mid caps,” it said.

HwangDBS expects local corporate earnings to grow 15% in 2010, after contracting 8.1% this year. It projected a further 11% growth in 2011.

The rebound in earnings will come from lower provisions and higher non-interest income for banks, absence of forex losses for plantation firms and a recovery in power demand for Tenaga Nasional Bhd.

Corporate Malaysia wrapped up its second-quarter earnings reporting season last week.

CIMB Retail Research yesterday noted the August results season likely signalled that “the worst is behind” and that more companies had beaten expectations than disappointed the market.

“This would be a major milestone and the first-time earnings momentum has turned positive since the last quarter of 2007,” it said.