Technical | Fundamental Analysis Discussion Stocks Listed In Bursa

Tuesday, September 1, 2009

Market Commentaries & Technical Analysis as at 01 Sept 2009

Investment Theme For 2009

*** UNCERTAIN ***

1. Privatization And M&As Deals

2. A Stronger Ringgit Policy

3. Implementation Of the Ninth Malaysia Plan

4. Asset Reflation Theme

5. Iskander Development Region (IDR) In South Johor

6. Eastern Corridor Development Programme (Petronas-Led)

7. Northern Corridor Economic Region

8. Sarawak Region Corridor

9. The Sabah Development Corridor

10. Sarawak Corridor of Renewable Energy (Score)

11. RM40 Billion Public Transport Expenditure

12. The Asia Petroleum Hub In Johor

13. The Solid Waste Management Play

14. Flow of OPEC Petrodollars

15. The Trans-Peninsula Pipe Project

*** UNCERTAIN ***

16. Water & Water-Related Play

17. A U-, V-, W- Or L-Shaped Global Economic Recovery

18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings

19. The Economic Stabilization Plan & Mini Budget

20. Interest Rate Cycle (Speculating End Of Easing Cycle As Economy Recover)

21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)

22. Liberalization Of The Services/Financial Sector

23. The Malaysian Government’s Reform “Train”

24. GLCs Revamp

25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)

26. A ‘Third Stimulus’ Package (Uncertain)

Watch List In The Coming Week

2010 Budget Announcement;

Market Commentaries

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.

2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.

If there is any rate action, it will be in baby steps and probably in the second half of 2010. It did not see a resurgence in high inflation now (Aug 2009).

High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”

There was a need to reinvent Asia and make a shift from external demand to domestic demand.

Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.

The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.

It also encouraged investors to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery.

Technical Analysis

The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index were fast reaching the overbought territory. It flashed a short-term at the bottom on Aug 21 2009.

Elsewhere, the 14-day relative strength index drifted sideways to marginally higher the past week to settle at 58 points on Friday.

In stark contrast, the daily moving average convergence/divergence (MACD) histogram sustained the negative expansion against the daily signal line to stay bearish. It triggered a sell on Aug 12 2009.

Weekly indicators continued to deteriorate, with the weekly slow-stochastic momentum moving out of the bullish zones after issuing a sell a week ago, and the weekly MACD in danger of tripping below the weekly trigger line.

Bursa Malaysia appeared still in consolidation phase although the principal index was able to chalk up modest gains the past week.

As all of us can see, daily volume has been shrinking over the past several days. While the bulls take a longer-than-expected breather and the market turning sluggish, pessimistic investors moved to the sidelines adopting the “wait-and-see” on suspicions the market may be in distribution mode after a strong run up.

Based on the daily chart, the prevailing trend remains bullish and it looks like the FBM KLCI is in the midst of constructing a concrete platform for the next rally.

Perhaps, the reason why trading was dull and thin could be because many people were away on holidays during the school break, combined with the start of Ramadan.

Therefore, investors should not be overly worried but can consider accumulating more on dips.

Technically, the daily and weekly MACDs still are pointing at consolidation, probably sideways pattern until a bullish breakout is detected.

Support floor is maintained at the 1,150 points, followed by the 1,140-1,142 points band.

To the upside, the key index will encounter significant resistance at the recent peak of 1,196.46 and the next, at the 1,200 points psychological mark, of which a successful penetration will signal a resumption of the mending process.

Undermining Factors

1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);

2. Malaysia Political Uncertainty;

3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);

4. Volatile Foreign Exchange Market (Signs Of Volatility Has Peaked);

5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);

6. Commodities Prices (Strengthening);

7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation

8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises

========================

1. Terrorist Attack –

2. Oil Supply Disruptions –

3. A Pandemic Disease – Swine Flu (Spreads Worsening)

4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;

5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Imminent Rebound In 2H2009 .. But With Threats !!!

Recession – Recovery – Growth – Boom - Burst

(Stabilizing Stage But Need More Improvements For Recovery Theme To Play Out)

a. What’s NEXT For The Global Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery

b. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY

c. What’s NEXT For The US, China & Malaysia Equities Market

d. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water

e. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.

f. What’s NEXT (2H2009) For The Malaysian Equities Market …

g. Factors That Could Derail The Global Economic Recovery …

h. Carry Trades Are Making A Come Back Into Emerging Markets

i. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

j. Beyond 2Q2009 Corporate Earnings Malaysia Listed Companies

a. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery

Signs that Asian economies are on a recovery path are growing although the pace of recovery will likely be moderate.

The worst is behind Asia, given the emergence of more signs of a bottoming-out in the region and globally. Asia (economies) have bottomed out and will stabilise. Recent data from G7 countries showed that the recession in these countries is easing. The worst is clearly over.

The Organisation for Economic Cooperation and Development’s (OECD) composite leading indicator, which rose for a fourth month in June 2009, was a clear sign of the bottoming out in the United States, Japan and Europe.

Asian economies are about to turn the corner and raise their contributions to the global gross domestic product (GDP). It (Asia) will stabilise and recover in the second half of this year (2009) and continue to improve in 2010 on increasing external and domestic demand

Growth in China, India and Indonesia would remain robust while in Malaysia, Singapore and Thailand, the pace of growth could remain uneven. Other Asian economies that have entered the positive territory in the second quarter of the year (2009) are South Korea and Singapore with a growth of 2.3% qoq and 20.7%, respectively.

But Malaysia is still lagging, with the tide expected to turn only in the third or fourth quarter of 2009. Perhaps, Malaysia can learn the benefits of speedy implementation of economic stimulus programmes from some of these Asian countries that have successfully averted technical recessions, so that its economy too can recover alongside those of its peers.

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.

2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.

If there is any rate action, it will be in baby steps and probably in the second half of 2010. It did not see a resurgence in high inflation now (Aug 2009).

High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”

There was a need to reinvent Asia and make a shift from external demand to domestic demand.

Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.

The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.

It also encouraged investors to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery.

By AMResearch …

News that Germany and France have emerged from a recession has helped to underscore a positive vibe that has slowly gained momentum following one set of encouraging news after another.

The news of two major economies coming out of recession in Europe follows news of strong quarter-on-quarter economic growth in Singapore during the second quarter 2009 and Indonesia’s economy growing by 4% in the second quarter 2009 from a year ago.

The huge fiscal stimulus announced by the Government would work its way deeper into the economy in the months ahead (Aug 2009 & Beyond) and that should help lift economic growth into positive territory in the fourth quarter 2009.

The global recovery in exports had resulted in higher production in most parts. We also see more signs of a bottoming out in the case of domestic demand as deterioration in labour markets has somewhat been mild.

It is almost consensus that a global recovery would occur by the second half of 2009, but it would remain modest, Malaysia will not be left behind, though it may lag due to structural and policy constraints.

The economic recovery would be U-shaped rather than V and felt that economic growth would contract by 5% in the second quarter 2009. GDP would contract by 3% in the second half of this year (2009) but economic growth should turn positive in the final quarter of the year 2009. Expecting GDP to grow by 1,5% in the fourth quarter 2009.

By Affin Investment Bank …

The recovery in the US and Europe would continue in this half of the year (2009) and US fiscal stimulus, along with increased auto production from the cash for clunkers programme, would help economic growth.

Private sector economists and the market are having higher expectations on the recovery.

Expecting Malaysia’s full year GDP to contract by 2.8% against the Government’s current estimate of a shrinking of between 4% and 5% of the economy this year (2009).

By Maybank Investment Bank Bhd …

The better industrial production numbers in the second quarter should point to a smaller contraction in economic growth in the second quarter 2009.

Predicts Malaysia’s real GDP will contract 5.9% year-on-year in the second quarter 2009 after falling 6.2% year-on-year in the first quarter and expecting the economy to expanded by 2.5% last quarter (2Q2009) from the first quarter after shrinking 3.4% quarter-on-quarter in the fourth quarter of 2008 and 7.7% quarter-on-quarter in the first quarter of 2009.

By AmResearch …

Signs of a recovering global economy have convinced economists that Malaysia could have seen the worst in the first quarter (1Q) of 2009, prompting some to price in positive numbers for the country’s gross domestic product (GDP) as early as 4Q this year (2009).

The optimism is based on a gradually improving external trade environment, albeit still contracting at a slower pace, and rejuvenation of domestic demand in recent months, helped by policymakers’ monetary and fiscal policies.

The general view is that the country will likely register its first full-year GDP contraction in 2009 since the regional financial crisis in 1998, given that the economy in the second and third quarters of 2009 will continue to shrink against the backdrop of a still weak global platform.

Malaysia’s economy could see smaller annual contractions in the second and third quarters before registering growth in 4Q 2009. The optimism is based on a recovering Malaysian manufacturing sector due to demand from regional countries such as China, India and Singapore.

Although external demand may be weak, expecting significant improvement in domestic demand due to the easing of monetary policy and higher fiscal spending.

Since the regional economies will not get much help from the global economy as was the case in the late 1990s, reckon that Malaysia’s recovery will most likely follow a U-shape.

Malaysia’s economy has shown some signs of a bottoming out in tandem with the pick-up in confidence as well as manufacturing activity.

While there were signs of a recovery in the global electronics sector, it was still unclear whether these were indications of inventory rebuilding or rising final demand.

Its principal worry is the sustainability of global recovery, especially in the US and Europe. What if growth stalls, and what if recent stimulus programmes fail to stimulate domestic demand? Also, the Americans are becoming net savers rather than spenders in recent months.

By TA …

The Malaysian economy could have reached its trough in the first quarter 2009 and was expected to be dictated by weaknesses in the domestic and global landscape.
In the sub-division of supply, the manufacturing and construction sectors may be the drivers of economic growth. Not to mention, the liberalisation of the services sector in line with the New Economic Model may stimulate growth within the services industry.


Moving into 2010, the Malaysian economy may observe growth on the premise of a rebound in the international trade segment, parallel with the increase in investment expenditure.

Anticipates that Malaysia would register an annual GDP contraction of 4.6% in 2Q 2009, before posting a decline of 4.2% in 3Q. Fourth quarter GDP is expected to expand by 2.8%. Full-year GDP is expected to shrink by 3.1% in 2009 before registering a 3% expansion in 2010.

The government has initiated two economic stimulus packages with a combined value of RM67 billion to boost domestic demand to counter-act falling exports.

By RHB …

Global recovery was on track considering that credit markets had stabilised while downside risks to economic growth had dissipated.

Business and consumer sentiment, besides investors’ risk appetite, have improved, resulting in better asset prices and a more manageable world economic landscape.

The recovery pace, however, will likely be slow and gradual given that the corporates and households in the developed countries that have gone through the massive destruction of wealth would still need to repair their balance sheets before they can spend more aggressively for an economic revival.

The improvement in the global economic outlook will likely translate into an improvement in demand for Malaysia’s exports in the second half of the year (2009).

For now (Aug 2009), while many claim to see the light at the end of the tunnel as major economies such as the US and European nations exhibit more encouraging economic data, it is worth noting that high unemployment rates may continue to stifle demand in the coming months (Aug 2009 & Beyond).

Going forward, one trend that will be keenly monitored is how generous lenders are in extending lines of credit to consumers and corporates. These could be tell-tale signs of Malaysia’s economic fortunes in the months ahead (Aug 2009).

By MIER …

Malaysia may not be able to cut its deficit to below 7 per cent of gross domestic product (GDP) in 2010 as it needs to spend to spur the economy. Malaysia will probably have large deficits for "years to come" and 10-11 per cent in 2010.

A bigger deficit could lead to a weaker ringgit and lower the country's sovereign ratings, but this should not be a big worry now (Aug 2009). The government can offset this by showing a clear timetable to balance the books and a timeline to achieve it, and how it proposes to increase revenue.

Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah had said the government plans to cut operating expenditure by 15 per cent next year (2010) to rein in the budget deficit.

After announcing RM67 billion worth of stimulus measures, the government expects the deficit to rise to 7.6 per cent of GDP.

The 15 per cent cut in operating expenditure sounds like a tall order requiring painful adjustments ... it's easier said than done. The only way the government can bring down the deficit is through controlled expenditure.

By Khazanah …


Meanwhile, Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar said the Malaysian economy has not fully recovered from the 1998 financial crisis in many respects. The last five to six years (2004-2008) have been a commodity boom. With a country rich with commodities we should not be having a fiscal deficit. This betrays a deeper structural issue.

Azman also expressed concern about the drop in investments. Savings have remained in high 30 per cent while investments have dropped 20 per cent, raising the question as to why the corporate businesses have been investing less and what needs to be addressed.

b. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY.

Common questions facing investors are: If they are not in yet, should they continue to stay out? And for those who are already in, is it time to cash out?

The dilemma is a tough one but the events that have unfolded may provide some insights into what to expect in the new few months (Aug 2009 & Beyond).

The hyper bull market in China was undone by what had started in the first place. Signs of tightening credit appear to have burst the bubble in the China stock market and coincidentally deflated the tyres of a five month (Early Till Mid Aug 2008) undisrupted rally, not only in that country but also other Asian bourses.

Right now (Aug 2009), the global stock markets seems to be still holding up despite the steep fall in China. However, with stock market volatility increasing, fund managers are expecting a correction n the next few months (Aug 2009 & Beyond) of between 10% and 15% or even up to 20% at the most.

Having said that, rather than seeing it as a fear factor, investors should see opportunities for the accumulation of stocks. Some believe that the global stock market is entering a correction phase, though it still seems resilient at this point.

Risk premium has come down a lot compared with earlier 2009 as earnings and macro numbers stabilize. Doubts there is any significant correction other than investors taking the opportunity to take some profit before buying again.

Morgan Stanley said that the recent turbulence (Aug 2009) in risk markets such as China is just a correction. It states that it will not get bearish until it sees policy tightening, material macro data disappointment or excessive valuation.

NONE IS APPARENT NOW (AUG 2009).

What is notable is, first, global markets taking their leads from Chinese markets, and second, the hyper sensitivity of equities to any hint of policy tightening. WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY.

The global stock market trend in the mid Aug 2009 SUGGESTS THAT WHAT CHINA WILL DO WILL MATTER FOR EVERYONE.

All eyes are on China to maintain a fine balance between a stimulating its domestic economy and not creating bubbles in real estate as well as the stock market. Creating and subsequently allowing the asset bubble to burst will have serious repercussions for china’s banking sector, which disbursed RMB7.73 trillion of loans in the first seven months alone.

It will unsettle sentiment among global investors as well. THERE IS INCREASINGLY MORE CO-RELATION BETWEEN THE MOVEMENTS OF CHINA’S STOCK MARKETS AND THE WORLD’S MAHOR EXCHNAGES IN TERMS OF INVESTOR SENTIMENT, ESPECIALLY IN ASIA.

Geographically, we are close to China. Also investors sees Asia as a growth centre, with China taking the lead. Hence, it is not surprising that the China stock market has become an important pointer for its neighbours.

For markets to sustain current valuations (Aug 2009) and even extend from here (Aug 2009), earnings expectations increasingly have to be met or beaten as we move into year end (2009).

The markets may be expensive but they are not excessively expensive, even for the China stock market. Which is why any correction is unlikely to be significant. It is understandable that the US stock market does not command the kind of premium that Asian markets do because there is a greater risk of earnings shortfall in the former and that the US economy, even when it recovers, will not grow as fast as the Asian economies. The US IS NOT A GROWTH MARKET!

Going forward, if China remains a leading indicator, and if the situation in US continues to be stable, investors are unlikely to have to worry too much. Opportunities will arise for those who have missed the boat.

The consensus view is that with China’s exports still weak and unemployment rising, China will continue its expansionary fiscal and monetary policy. It is just that there will more scrutiny to ensure that credit resources are diverted to productive investments, which will strengthen real economic activities rather than continuing to create bubbles in the stock market and real estate sector.

The global equity market may be entering a transition phase from one led by a recovery in Chinese growth to one where growth is led globally by a recovery in the US going into year end (2009) as well as ongoing growth in China. While a near term correction may emerge, investors should remain focused on their longer term risk appetite and goals and engage in rebalancing their portfolio towards these targets.

The new trend is that investors may increasing benefit from shifting their focus from macro driven factors, such as the Chinese economy, to concentrating on stock selection, which will be the key.

c. What’s NEXT For The US Equities Market

As equity investors ponder whether the recent (Aug 2009) pullback in equities is just a brief pause for breath in an extended rally, fixed-income markets are signalling a less optimistic view of the economy and the consumer.

Until late Aug 2009, equities had diverged from the bearish performance of corporate credit and steady decline in Treasury yields. Then, equities were hit by selling, a move which extended the weakness in credit and boosted government bonds further.

This split in thinking has long been a feature of trading across asset classes, with equities usually reflecting a more optimistic view of the economy and the consumer. But over the Aug 2009, the debate over the sustainability and strength of a recovery in economic activity has intensified.

Equities in Japan, Europe and the UK have also pulled back after a strong rebound from their lows in March 2009. While data from Japan, France and Germany show that their economies have pulled out of a recession, doubts remain about how quickly activity will normalise. There are a number of headwinds in the economy and they are not really going away very quickly or easily.

Economists expect the US will expand in the third quarter 2009, as low inventories are built back up, but recent US data (Aug 2009) has highlighted weak consumption and tighter credit standards. The latest Federal Reserve loan officers survey for the three months ending July 2009, revealed further tightening in lending conditions.

Against a backdrop of high and rising unemployment and declining real incomes, it would be a leap of faith to suggest that this situation is going to change any time soon.

That has fuelled a Treasury rally, with the yield on the 10-year Treasury note back below 3.50 per cent, down from near 3.90 per cent at the end of the first week of August 2009. Once you stabilise, the recession ends, but the reality is that US face very weak growth as consumer balance sheets take time to adjust. There have been solid inflows into Treasuries since yields recently (Aug 2009) peaked.

Institutional investors such as Pimco have recently sought to lower their risk to some areas of the credit market, such as high yield, which has rallied more than 30 per cent this year (Till Aug 2009). High yield has been the winner of the year and it's time to turn cautious.

The second half of the year (2009) is going to see choppy waters for credit and that is a function of the economic reality being pretty weak with credit being range bound.

For many companies, however, cost-cutting translates into slashing jobs or wages, and the bleak employment picture, in turn, weighs heavily on consumer spending and confidence.

Consumers in different income groups have their own reasons to keep a lid on spending, be it high unemployment in the low-income segment, the overlevered balance sheets of the middle class, and lost wealth and fears of tax hikes among high earners.

US Equities have yet to fully reflect the consequences of declining nominal sales and incomes, which in part was evident in the economic data from the latter part of last week (Aug 2009).

The bank warns: "In particular, with an absence of corporate cheerleading for the next couple of months (Sept 2009 & Beyond), the economic news will likely need to improve somewhat for equities to make much headway during the tricky months of September and October 2009.”

**********************

In the past five months (March 2009 – July 2009), the world’s stock markets have gained more than 50 per cent. The big question now (Aug 2009) is: where next? This rally is not unprecedented but history offers few comparisons. Those that exist are all imperfect and contradict each other. But rallies in the last century stand out:

1930. In the wake of the Great Crash, the S&P500 staged a rally a lot like this one. From its low on November 12 1929, it rallied 47.2 per cent in five months. This fooled many. Anyone who bought at the top of the rally, on April 10 1930, would have lost 83 per cent over the next two years. If there is a rally for the bears to cite in their cause, this is it.

1932. Marking the very bottom of the 1930s’ bear market and arguably the most impressive rally in stock market history, the S&P did twice as well as in this current rally (March 2009 – July 2009), in half the time. It rose by 111 per cent in the 10 weeks from July 8.

This time (March 2009 – July 2009), the lows were never revisited. But the outlook was not good. After that violent upswing, just before the election of Franklin D.Roosevelt, the bear market dragged on for decades, with gains only for opportunists. The S&P fell 25 per cent once more by the end of 1932 and it would fall below its level of September 1932 in 1934 and again in 1938. This was not a great time to buy and hold.

1975. After the savage 1973-74 bear market, stocks enjoyed a 53.8 per cent rally from October 12 1974 to July 15 1975. In one five-month span, it gained 47.1 per cent.

In hindsight, it looks like a cousin of the 1932 rally, as the rally gave way to a bear market that ground on for the rest of the decade. Stocks were no higher three years later. Profits were only for opportunists.

1982. With Paul Volcker at the Federal Reserve still attacking inflation, and Margaret Thatcher and Ronald Reagan applying unpopular economic medicine, the 15-year bear market suddenly ended.

In the five months after August 12 1982, the S&P gained 43 per cent, starting a secular bull market that lasted until the tech bubble burst 18 years later. August 1982 was possibly the best time ever to buy stocks; early 1983 was still a good time.

This is the rally that bulls call to their aid. Those alarmed by the potential for fresh crises in emerging markets can even point out that this rally survived the first great Mexican devaluation crisis, which hit in the early weeks of the equity rally.

What did these rallies have in common?

Pessimism had grown overwhelmingly, with fear far outbalancing greed when they started. Except for 1930, they came near the end of severe recessions. They have both points in common with the current (March 2009 – July 2009) rally.

But there are differences. The rallies of 1932, 1975 and 1982 came when stocks were unambiguously cheap, and were still cheap after the initial 50 per cent rally. The cyclically adjusted price/earnings ratio, a multiple of average earnings over 10 years, was at extreme lows.

But in 1930, stocks never dropped to long-term fair value before rallying and were blatantly expensive by the time the rally ended. This time, prices fell a bit below their long-term average for a few months but the rally has already brought them back to look expensive.

In the critical sense of valuation, then, this rally (March 2009 – July 2009) looks nothing like 1932, 1975 or 1982. It looks a little more like 1930.

The environment of inflation and interest rates differed widely. In 1930, western economies were lapsing into deflation; in 1932, the world was mired in deflation; in 1975, it was stuck in inflation; and in 1982, inflation was high but coming under control.

The current (March 2009 – July 2009) picture does not fit with any of these – consumer price inflation in the west has been tame for decades. Last year (2008)’s crisis created the risk of severe deflation but the prompt decision by governments to throw money at the problem is a huge point of difference from 1930. Those who believe the deflationary scenario can logically forecast a repeat of the 1930 collapse in share prices. But this is a pessimistic point of view.

Parallels with 1982 do not work any better. The 1980s’ huge gains from steadily lowering rates and innovation in the financial sector are not available this time around (2009). The very opposite is more likely.

The 1932 rally came in truly extreme conditions.

But the 1975 rally may be a decent match; it came during a restocking boom after companies had slashed inventories (very much what the market is betting on now (Aug 2009)), at a point when oil prices were volatile and exerting a big influence on the economy.

The world now (Aug 2009) is still different in many important respects from 1975 but this may just be the best comparison. That would suggest the most likely outcome now (Aug 2009) is a protracted dose of directionless trading. For those more optimistic or pessimistic, you have your examples to hang on to.

What’s NEXT For the China Equities market …

Foreign funds have fled China's stock market during this month (Aug 2009)'s slump as quickly as they rushed in earlier in the year (2009), when they bet on a V-shaped recovery in the world's third-largest economy.

The quick exit means foreign investors no longer believe, as they did during China's stock market peaks in 2006 and 2007, that a bull run in Chinese stocks can last for years (2009 & Beyond) - a clear shift in attitude after China's market was battered by the global financial crisis last year (2008).

Industry observers said that capital inflows into China over the next few years (2009 & Beyond) will not rise close to - let alone exceed - peak levels seen in early 2008, dampening expectations sparked by a rebound in China's foreign exchange reserves in the second quarter of this year (2009).

This should help to serve as a clear warning to investors to be more cautious about investment allocations in China, at least for the rest of this year (2009). Investors should be more defensive as China's market conditions will not be able to recover to their peak any time soon.

China's stock benchmark, the Shanghai Composite Index, fell 20 per cent over a early two-week (Aug 2009), partly reflecting Chinese companies withdrawing money from the market as they shifted bank borrowings from short-term investments into longer-term projects.

The tumble followed a 90 per cent rally from the start of the year that stalled amid concerns about stretched valuations, tightening liquidity and fresh supplies of equity in the market.

Funds are flowing in and out of the (Chinese) market very quickly this year (2009), bucking a trend seen in the last bull run in 2006 and 2007. Fund inflows from foreign investors keen to join that rally are considered one reason why China's foreign exchange reserves leapt by US$177.9 billion in the second quarter 2009, compared with just a US$7.7 billion gain in the first quarter 2009, as the cumulative April-June 2009 reserves far exceeded the combined net inflows from the trade surplus and foreign direct investment.

The central bank and other financial institutions spent 528 billion yuan to buy, or absorb, new foreign exchange flows into China in the second quarter 2009, up only modestly from 420 billion in the first quarter 2009. In July 2009, the amount was 220 billion yuan. Those figures were only a fraction of the quarterly peak of 1.41 trillion yuan in the first quarter of last year (2008), and 654 trillion in January of last year (2008).

With China's economy having proved vulnerable to the global crisis, overseas investors are no longer all that certain about the Chinese growth story.

The prospects for China's asset prices are also less certain. Add in the fact that the yuan is no longer appreciating against the dollar, and it will be impossible for capital inflows into China to recover to their peaks in coming months (Sept 2009 & Beyond), or perhaps even years.

That will have a clear impact on the medium-term trend of the stock market. We are set to see a lingering market consolidation, during which the index will move around the 3,000 point mark for at least several weeks (Sept 2009 & Beyond).

China's economy is still recovering, although not as quickly as the market had implied earlier this year (2009). Liquidity in the system is good but not as ample as many investors had expected.

The Shanghai Composite Index has rebounded since late Aug 2009 but is now (Aug 2009) moving in a narrow range between its short-term five-day moving average, currently around 2,900, and its medium-term 60-day moving average at 3,060.

The index has still risen around 60 per cent so far this year (2009). In the last boom-and-bust cycle, the index fell 65 per cent in 2008 after it had more than quintupled in the two years to late 2007, battered by a sharp slowdown in China's economy as the global crisis took its toll.

What’s NEXT For The FMB KLCI …

Many agree that the stock markets are entering a correction phase. However, the jury is still out on how severe this correction will turn out to be…

It is believed that it is the start of a correction, but whether this will be a major correction that everyone is talking about. Whether this correction will turn out to be a massive moderation of the market – that is a clawback of more than 50% - remains to be seen.

Let’s say that it is a correction to reverse the five months of relentless rise (April – July 2009) from 836.21 to 1196.46. It may be gentle at first but let’s see how the world markets also pan out in time to come.

Critics say that this is happening now (Aug 2009) as growth concerns resurface in light of the recent monetary tightening in China. The good news for investors, however , is that the correction will not be as severe as in previous rallies.

Analysis of the two previous bear rallies – in 1998/1999 and 2001 – indicates that the pullback after troughs tends to be transitory, stretching no longer than two months. And the dips were 15% to 22% off intermittent highs, before rebounding by stronger percentages.

This time around, the correction may be less dramatic because the starting point of the recent upswing was from a depressed trough PPE of 11 times in March 2009, versus 16 times in April 2001. In the immediate term, the market may dip 10% off Aug 2009 high of 1187, forming a base of 1068 in the worst case scenario.

At the end of the day, markets have gone up a lot and risk to reward is not as attractive as before. China aside, movements in the US market must also be taken into consideration. US markets are generally turbulent between Aug and Oct, so some unsteadiness should be expected there. As such 1196.46 may be the peak for the market for now (Aug 2009).

Meanwhile it is worth noting that overseas investors turned net sellers of Malaysian stocks in July 2009 for the first time in four months, as the Southeast Asian nation’s stock market continued to lag behind regional peers.

Foreign funds unloaded US$121 million of Malaysian shares in July 2009, the equivalent of 56 per cent of the previous three months’ inflow. The reversal of fund flows is an “unwelcome surprise for us” and the outflow was “relatively steep”. All its regional peers enjoyed foreign fund inflows in July 2009.”

Foreign funds “lightened” their holdings in stocks such as Genting Malaysia Bhd, Digi.Com Bhd and PLUS Expressways Bhd, he said. Funds added to weightings in banks including Public Bank Bhd, Malayan Banking Bhd and RHB Capital Bhd.

Malaysia’s lower liquidity and velocity could be a symptom or cause, of foreign investors’ lack of interest in the market. The net selling could be a temporary hiccup that is consistent with past trends where it was relatively rare for foreign funds to be net buyers for more than three months running.

Kok Chin Keong

Remisier

Futures Brokers’ Rep

017-8860687

03-27112677; 27134673

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