RHBRI: Market Outlook & Strategy 2Q2012

More Signs of Recovery

The tail risk from the euro-debt crisis has subsided after ECB opens its liquidity floodgates. Elsewhere, more signs of economic stabilization and recovery have emerged, particularly in the US. As the global economic recovery gains momentum, external demand for Malaysia’s exports will likely improve as the year progresses.

Domestically, consumer spending remains resilient, which will be reinforced by the progress in the implementation of the Economic Transformation Programme to sustain growth. We envisage the country’s economy to grow at 4.5% in 2012, albeit at a more moderate pace than the +5.1% achieved in 2011. This will underpin corporate earnings growth, projected at +12.2% and +7.9% for 2012 and 2013, respectively (+8.7% and +7.0% ex-Tenaga).

But, anticipate a short-term market pullback?

Notwithstanding improvements in the global economy, we continue to expect a market pullback and consolidation in the 2Q. In our view, apart from rising market caution ahead of the general election due to the uncertain election outcome, earnings will also have to play catch up for stocks with rich valuations before the market can scale new heights. On the external front, concerns on Mainland China’s economy and a potential risk of an oil-supply shock will also weigh down market sentiment.

Beyond the near-term pullback, we expect market sentiment to gradually improve as global economic uncertainties clear out. As central banks in advance countries have unveiled more quantitative easing programmes and pledged to maintain extremely loose monetary policy to support economic growth, global financial markets are still likely to be awash with liquidity. Consequently, we are maintaining our end-2012 FBM KLCI target at 1,650 based on 14.5x 2013 EPS.

Given our more upbeat view on the market for the 2H, we believe “buy on dips” is still the best strategy to outperform the market even though defensive stocks will provide greater stability for the portfolio, particularly in the 2Q. Sector-wise, our key overweight continue to be telecommunications, gaming, Plantation, oil & gas and consumer.

Source: RHBRI report