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Categories
| Market range-bound, upside surprises in late 2009 |
| Business & Market 2009 | |||
| Written by Surin Murugiah | |||
| Thursday, 03 September 2009 10:47 | |||
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The better showing by small caps in 2Q09 reinforced its view that investors would do well to trade smaller cap sectors such as oil and gas, rubber glove, steel and construction. OSK Research said despite the strong upgrade-to-downgrade ratio, investors had largely priced in the earnings and were looking ahead to 2010 earnings. As such, even if the 3Q09 numbers proved strong, the impact on the market was likely to be muted, it said. “In fact, as realisation spreads that the recovery will likely be long drawn, we see more muted upgrades post-3Q09,” it said. Corporate earnings in 2Q09 improved as expected over 1Q09, with significant upgrades in banking, automotive, technology and rubber glove sectors given the improving economic outlook, said OSK Research. It said upgrades exceeded downgrades for the first time since 2Q07, adding in 2Q09, 38% of the companies’ results came within its expectations and an equal 31% outperforming and underperforming. It also said small caps fared much better, with 31% within and 35% above expectations compared with 54% that came in below expectations in 1Q. OSK Research upgraded the banking sector to overweight on improving earnings, and raised the automotive sector to overweight as sales volume was expected to pick up. A major portion of the banking sector results were above expectations, with year-to-date earnings on average coming in at 24.2% and 22.6% above consensus and its estimates. OSK Research upgraded the sector on grounds that non-performing loans were likely to remain benign while the downtrend in provisions and strong capitalisation position provide future earnings and capital management upside surprises. It has buy calls on Public Bank Bhd, BCHB, AMMB Holdings Bhd, Hong Leong Bank Bhd, RHB Capital Bhd and EON Capital Bhd, while rating Maybank as neutral. For the automotive sector, OSK Research has a buy on Proton Holdings Bhd, Tan Chong Motor Holdings Bhd, MBM Resources Bhd and New Hoong Fatt Holdings Bhd; neutral on EP Manufacturing Bhd and a sell on UMW Holdings Bhd. Meanwhile, RHB Research Institute said the results of 84.4% of companies under its coverage came within or above expectations. “Unlike the previous few quarters where the corporates suffered from falling demand, product prices and capacity utilisation rate as well as higher production costs and write-down on inventories, some companies are now reporting better margins from improving demand, better product mix and lower operating expenses on the back of the implementation of cost-cutting measures,” it said. The research house said banking was the key sector that reported significantly better-than-expected earnings, while the oil and gas as well as the consumer sectors also reported earnings that were generally above its forecasts. It said reflecting the improving global economy as well as corporate earnings visibility, investors had returned to invest in equities and the FBM KLCI benchmark had risen sharply by about 34% year to date, albeit underperforming its regional peers. “While the market may have run a little ahead of fundamentals given that the economy has yet to recover to positive growth on a y-o-y basis, institutional funds are still holding relatively low position in the market and are looking for a more meaningful correction to beef up their equity exposures. “This caused corrections and pullbacks to be relatively mild and has resulted in a subdued sideways trading in the recent month. Overall, the risk reward situation has shifted and is still in favour of equities, in our view,” it said. It said the market was likely to have entered a correction phase and it expected range-bound and sideway trading activity to persist until the resumption of stronger evidence of a solid global economic recovery emerged. With the upward revision in earnings, RHB Research said it was revising its end-2009 FBM KLCI target to 1,260, from 1,150 previously, based on unchanged 16 times 2010 earnings. “Our bottom-up valuation suggests a FBM KLCI target of around 1,310 currently, although this reflects a 6- 12 months investment view,” it said. RHB Research said stock picking was still a preferred investment strategy and advised investors to switch out of stocks whose valuations had become expensive relative to fundamentals (such as Gamuda Bhd, IJM Corporation Bhd, MISC Bhd, Malaysian Airline System Bhd, Maybank and Axiata Group Bhd) and buy into undervalued stocks on weakness for longer-term outperformance. This article appeared in The Edge Financial Daily, September 3, 2009.
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