2008 Post Elections Market Notes & Strategies Mentioned

Eric Clapton - Change the World

Posted on Sunday, 9th March 2008. Malaysia markets tipped to slide after poll drama

• A sales broker said he expected Malaysia's benchmark stock index, the Kuala Lumpur Composite Index (KLCI) .KLSE to fall around 50 to 100 points, or up to around 8 percent, on Monday as investors tried to answer that question.

From Kenanga Research

• Short term sell down creates opportunities for equities. Given the uncertainties, we expect foreign funds to sell down their portfolio in Malaysia. We recommend investors to accumulate fundamentally sound companies with strong recurring income that would largely be unaffected by the change in political composition in the government. The sectors to focus on are plantations, banks, oil and gas, consumer and construction companies with significant overseas order book. IOI (HOLD; TP: RM8.45), Sime Darby (TRADING BUY; TP: RM12.90), KLK (BUY; TP: RM22.00), Hap Seng Plantations (BUY; TP: RM4.38), Coastal Contracts (BU Y; TP: RM3.48), Alam Maritim (BUY; TP: RM3.32), RCE Capital (BUY; TP: RM1.15), Parkson Holdings (BUY; TP: RM11.60), Pelikan (BUY; TP: RM4.70), Muhibbah Engineering (BUY; TP: RM4.78), Malayan Bank ing (BUY; TP: RM14.20), Bumiputra Commerce (BUY; TP: RM12.60) , Resorts World (BUY; TP: RM4.84) and Genting (BUY; TP: RM9.90).

I have loaded the following screenshots from RHB report today.

Some notes from Aseambankers

• The construction sector will be most affected by the changing political landscape. We are concerned over implementation delays for yet-to-be awarded 9MP mega projects, as resources could be geared towards: (i) an overhaul of the government’s machinery and delivery system, rather than project implementation, and (ii) socioeconomic causes such as maintaining subsidies. Likewise, some state projects now under opposition rule could be sieged by concerns on land alignment and transparency of project awards. The implementation of the NCER development initiative may also see some setback. We expect near-term prospects to be unexciting and challenging in terms of margins compression. With sweeping changes anticipated at the Federal Cabinet level, we also expect planned major water infrastructure projects to take a back seat in implementations. Major stock downgrades are on Gamuda (to Fully Valued), and IJM Corp (to Fully Valued). Buy still on WCT Eng, and Sunway Holdings.
  
  Downgrading KLCI target
  Market could significantly weaken on opening. The last time we had a similarly unexpected – though less shocking – General Election result was in 1999, when in addition to the continued failure to win back Kelantan, BN was defeated in Terengganu and almost lost its 2/3 control of Kedah. We noted that the KLCI reacted negatively in the first week after the 1999 General Election but rebounded strongly thereafter. However, this time around, we foresee a more profound reaction as external concerns compound the uncertainty over the country’s political and legislative climate. As it is, KLCI is already down 10.3% so far this year, reversing the 32% gain last year amid turmoil in the global financial markets following the worsening of the US subprime crisis and its impact on US and global economic outlook.
  
  We are reducing our YE KLCI target to 1,350 points (previously 1,450) after lowering our 1-year forward target PE multiple to 14.0x (previously 15.0x). We anticipate further foreign selling, as what appears to be renewed selling in the S&P500 last Friday compounds concerns of a potential review of some 9MP projects (as the Government is likely to increase allocation of resources to social programs – details in ensuing paragraphs), and producers’ inability to swiftly raise prices on controlled or monitored items.
  
  Downgrading construction, water, building materials, property and power sectors. Our downgrades on the latter three sectors to Neutral reflect our expectations for foreign investors to hold back on en bloc purchases, and for a slower future tariff adjustment for Tenaga (like other companies which are or may be seeking price hikes). We downgrade Tenaga to Hold with a RM9.80 target price (see today’s separate writeup). Our downgrade on the property sector also takes into consideration that most property companies are mid-cap stocks, and mid-caps could trade at modest valuations (<10x>

Some technical notes from Aseambankers

• … but less excitement for the equity market. Technically, although the feel good factor could lead to a potential rebound over the next few days, we believe the broader market will remain challenging, as sustainability is in doubt. The “Head and Shoulder” pattern, which had materialized since mid February, triggered the steep selldown in the local bourses, pushing the KLCI below the 1,300 psychological level. Current market breadth is relatively weak as we always find momentum easing on strong upticks. While the indicators are becoming more appealing, our main concern remains very much on the drying market liquidity. We believe the KLCI will need to overcome the 1,350 level before we can conclude the recent downward trend.
  
  Technical pullbacks towards 1,150? Though unlikely in the near term, we wish to highlight that the weekly chart reflects that the KLCI is still riding on a bearish trend. The MACD signal line, after staging a negative crossover, is plunging towards the oversold zone. Meanwhile, the long black Japanese candlesticks also suggest that any attempts for recovery could be short-lived. As such, should the KLCI falls below the 1,250 level, investors should stay sidelined as the consolidation phase could last for months.

And some commentaries from Dali.

• http://malaysiafinance.blogspot.com/2008/03/next-moves-impact-shadow-cabinet-you.html
• http://malaysiafinance.blogspot.com/2008/03/chatting-with-seng-9-mar-08-1717-dali.html

*** update 1:00 pm ***

From Credit Suisse

• 0401 GMT [Dow Jones] The Malaysian election results are a "surprise to everybody so we have to reassess what's going to happen" on some of the country's major investment themes, says Arjuna Mahendran, head of research at Credit Suisse. Palm oil and property plays are not likely to be affected very much, he says, but utilities and airlines could be in for some turmoil now that planned industry restructurings are up in the air. Uncertainty makes it hard to decide what to do over the next 2-3 months, Mahendran says, but if share prices drop enough, it could be a good buying opportunity. With Malaysia, domestic factors matter less than international factors, he says. "Lots of money in Malaysia is foreign and to the extent fund managers in NY are pulling out or putting money in has more impact than what locals are doing." (EGS)

from Duetshe Bank

• 0409 GMT [Dow Jones] Deutsche Bank says Malaysia's surprise election outcome, with ruling coalition Barisan Nasional losing two-thirds majority and four key states, marks short-term negative, long-term positive for country's stock market. "BN's poor showing will certainly spook the market, not due to the potential risk of riots, a sudden change in economic policy or a backlash by the incumbents but more because of the political uncertainties which lie ahead," report says. However, says result "could well be the catalyst required to force the government to push through with much needed structural reforms to improve Malaysia's competitiveness, regain confidence amongst the non-Malays and to bridge the divide between the Malay elite and grass-root supporters." Says market valuation remains attractive at 14.6X PER, 19% EPS growth for 2008, 4% net yield, but adds lack of short-term catalysts, political uncertainty/risks will probably cause market to give back 1Q's relative outperformance. (LES)

From Fitch and S&P

• 0453 GMT [Dow Jones] Malaysia's sovereign credit ratings, outlook unlikely to change despite stunning election results, with ratings firms citing intact credit trajectory; "Going forward, there could be some policy uncertainties or political uncertainties and therefore we are keeping a close eye on them, but we do not see any change in the fundamental trend of the economy," says Franklin Poon, lead analyst for Malaysia at Fitch. Both Standard & Poor's and Fitch have A- rating with positive outlook on Malaysia while Moody's rates sovereign A3 with stable outlook; Moody's vice president Aninda Mitra says election results don't necessarily mean government's power now clipped; "If the government responds to the verdict of the poll by making more headway against corruption and other scandals that have been plaguing the government, that would obviously help," says Mitra. "The election results were a bit of a negative surprise, but it's far from writing off the abilities of the Malaysian government at this stage," he adds. (DLZ)

From HwangDBS

• 0459 GMT [Dow Jones] Hwang DBS Vickers Research cuts KLCI year-end target to 1360 from 1570 after ruling Barisan Nasional coalition had its worst-ever general election performance; year-end target implies P/E multiple of 13X CY09 earnings, at lower end of historical 5-year P/E band of 12X-18X; says stock market likely to be clouded by sense of insecurity in near-term; "nevertheless, once the dust settles, the defensive trait of our local bourse -- on the back of fairly resilient domestic consumption, buoyant commodities prices and a rising ringgit -- would appeal to investors wanting to seek shelter amid the prevailing volatility in the global financial markets," Hwang DBS says; cites Public Bank (1295.KU), YTL Power (6742.KU), KNM (7164.KU) as top picks among big caps. (BEL)

From CIMB

• Malaysian investment bank CIMB cut its recommendation on Malaysian shares to neutral from overweight, citing the political uncertainty. It also cut its year-end target for the KLCI index to 1,380 points from 1,700 points perviously. The index was down 6.4 percent at 1,213.74 at 0304 GMT.

Commens posted on Edge ( here )

• But despite the strong mandate, the changes as expected by the people did not really come through, said Scott Lim, chief investment officer of CMS Dresdner Asset Management.
  
  “The results of the latest general election can be viewed as a silver lining. Malaysians have voted in several new state governments to institute the changes. The BN coalition will now be forced to make changes as per the aspirations of the people.
  
  “What investors don’t want to see is parties fighting each other at the expense of the people and the country. Decisions have to be made as to how they want to bring development irrespective of their differences. It must not be at a stalemate. Now, all decisions made have to be truly in the interest of the people regardless of racial and religious lines,” said Lim.
  
  Among the changes that investors generally want to see are more transparency in the award of contracts, the government making difficult decisions to reduce its excesses and taking serious efforts to stamp out corruption. There were some measures taken in all three fronts but the election results indicated that the people wanted more.
  
  Kaladher Govindan, the head of research at TA Securities, felt that the results could be viewed positively as foreign investors note that Malaysia does not have a strong opposition to provide checks and balances.
  
  “They complain that there is no real opposition here to provide the checks. Now, we have a strong opposition,” he said.
  
  But a fund manager who concurs with Kaladher’s view stated that the general election showed that BN was not “untouchable”, and that the foreign funds would not be eager to put their money in just yet.
  
  “All along the KLCI is traded at a premium to the regional markets largely because of the political stability. This will no longer be the case, we will have to forgo the premium, maybe cut a hundred points off the CI or more,” said the fund manager.
  
  Singapore-based Tai Hui, Stanchart regional head of research for Southeast Asia does not think that the results of elections have incorporated a political risk to the Malaysian market in the immediate term.
  
  “Investors will be watching more closely than ever. I don’t think Malaysia is going through the same route as Thailand and other countries where there was political instability. There are conflicts between parties but not to the extent of social instability,” said Tai.
  
  Moreover, Tai said that Malaysia had well established institutions such as Bank Negara to manage the economy, while the BN still had a majority in parliament.
  
  “The majority will ensure that operations will not be an issue. As long as there are such institutions, Malaysia will always be different,” he said.
  
  The market is expected to see some heavy selling following the BN’s significant reduction in parliament and also the loss of Penang, Kedah, Selangor and Perak. Some dealers are expecting a correction of between 30 points to 100 points from KLCI’s close of 1,296.3 points last Friday.
  
  Lim of CMS said that there would be some knee-jerk reaction but it could also provide an opportunity.
  
  “There will be some panic selling. Some people will be irrational enough to dump the baby with the bath tub. If it becomes a crisis, there will be an opportunity,” he said.
  
  On Malaysia’s losing out on its political risk premium, Lim said the system had matured now that it enjoyed a two-party political system.
  
  “The risk will rise as Malaysia has never had a two-party political system. But the checks and balances will be obvious,” he said.
  
  Tai said that the latest development would put the pressure on the government to ensure that the economy continued to grow and the inflation kept under control. Considering that rising cost of living was an issue in the elections, Tai said that the government may have to keep prices low.
  
  “The government may have to step up on its fiscal stimulus programmes in light of the slowdown in the global economy,” he said. But Tai also said that the rising cost of living and inflation was an issue not unique to Malaysia but all countries in the region