FOCUS OF THE DAY

Market Strategy :Next leg up to be earnings-driven; fair value raised from 1,050 to 1,190


In our earlier strategy report - Bear rally but vicious liquidity cycle to sustain run, April 2009, we pointed out that the KLCI was entering an extended bear rally from a vicious liquidity cycle. After rebounding 26% off lows in March 2009, the KLCI is now negotiating a mid-cycle correction. Our analysis of previous two bear rallies - in 1998/1999 and 2001 - indicates that a pullback after troughs tends to be transitory, stretching no longer than two months.

This time around, the correction may be less dramatic because starting point of the recent upswing was from a depressed trough PE of 11x in March 2009, versus 16x in April 2001. Fundamentally, we are unmoved. We have raised our fair value from 1,050 to 1,190 by rolling-over the valuation base into 2010 on an unchanged PE of 15x.

Key risk is renewed concern over inflation with an associated upturn in interest rate cycle - putting an end to net liquidity creation. Two themes for 2010 are infrastructure spending and reflation. Faster return to growth must be anchored by domestic demand via a resurgence of public spending. Our fixed income team believes funding for infrastructure projects is not a concern as Malaysia’s excess domestic liquidity is more than RM250bil, although yield may climb to entice demand.

We continue to like reflation trades - oil & gas, plantation, property and steel - given demand kicker from improved prospects of an economic recovery and a weak US$. Our top-ten BUYs are IJM, WCT, Gamuda, Ann Joo, IJM Land, SapuraCrest, Kencana, IOI, Asiatic and Bumi-Commerce.