KUALA LUMPUR: Stock-market punters are likely to respond well today to news that the country’s third-quarter (3Q) gross domestic product (GDP) surpassed market estimates, raising expectations that the country has seen the worst amid a still-volatile global trade landscape, economists said.

Last Friday, Bank Negara Malaysia (BNM) announced that the economy contracted by a smaller annual rate of 1.2% in 3Q, helped by further growth in the CONSTRUCTION [] and service sectors, and by higher household and government consumption.

AmResearch Sdn Bhd senior economist Manokaran Mottain, who had expected a 2.5% contraction, said the improvement was a “surprise for the market”, as estimates had indicated an over 2% contraction for the quarter. For the nine months to September, GDP declined 3.8% year-on-year (y-o-y).

“It shows the economy has come out of its worst point. The investment community will take it positively,” Manokaran told The Edge Financial Daily over the phone.

In 2Q, GDP contracted by 3.9% y-o-y but registered a 4.8% expansion quarter-on-quarter (q-o-q), while 1Q GDP declined 6.2% y-o-y and shrank 7.7% q-o-q.

The economy has now shown two consecutive quarters of growth after 3Q GDP grew 5.7% q-o-q.

Regional economies have also reported better 3Q numbers. China saw its economy expanding at a quarterly rate of 8.9% after growing 7.9% and 6.1% in 2Q and 1Q, respectively, according to the National Bureau of Statistics.

Nearer to home, preliminary estimates by the Singapore trade and industry ministry indicate that the island-nation’s economy grew by an annual pace of 0.6% in 3Q versus a 3.3% contraction in 2Q.

Many now see positive numbers for Malaysia’s economy in 4Q. The optimism is by virtue of a gradually improving external trade environment and rejuvenation of domestic demand, boosted by fiscal and monetary policies.

Malaysian policymakers are now projecting a 3% contraction for 2009 versus earlier estimates of a 4%-5% decline. In 2010, the country is expected to register an expansion of 2%-3%.

FTSE Bursa Malaysia KLCI fell 0.18% or 2.29 points to settle at 1,274.36  points last Friday. It has gained 45% this year.

In a note to clients, CIMB Investment Bank Bhd head of research Terence Wong said the research house was maintaining its overweight stance on Malaysian equities and expecting the stock index to hit 1,400 points by end-2010.

Wong recommended a few companies for their attractive valuations and strong business fundamentals.

He said low-cost carrier AIRASIA BHD [], casino operator Genting Malaysia Bhd and property developer S P Setia Bhd deserved to trade at a premium over their peers as they were the largest and most successful companies in their sectors.

On AirAsia, Wong said the stock was trading at a steep discount to its global peers on a price-to-earnings ratio (PER) basis and was deeply undervalued for a company with a strong franchise.

The firm is deemed the largest and most successful low-cost carrier in Asia, considering that it had broken the monopoly of full-service carriers and their high-fare and high-cost culture. CIMB has a target price of RM1.90 for AirAsia based on a core PER of nine times.

“Our outperform recommendation is premised on AirAsia’s continued secular growth and cyclical yield recovery as regional airlines factor in higher fares.

“The key wildcard is oil prices, as AirAsia is presently unhedged in 2010 and beyond,” Wong said.

Valuations of Genting Malaysia shares are deemed cheaper than that of other international casino operators. Also worth  noting is the company’s huge cash pile, CIMB said. It retained an outperform call on the stock with an end-2010 target price of RM3.77.

“Potential share price triggers are its solid gaming operations and its sizeable cash pile which could translate into higher dividends and/or potential regional M&As,” Wong said.

Meanwhile, potential re-rating factors for S P Setia include possible joint ventures with its major shareholder Permodalan Nasional Bhd to develop the latter’s vast landbank and the developer’s improving earnings, going forward.

Wong expects S P Setia to excel in the coming years by virtue of its “solid, very driven and relatively young top management”, besides the company’s ambition to expand overseas.

“We believe overseas expansion is necessary as the group is already the leading developer in Malaysia with a large earnings base that will be difficult to grow strongly,” said Wong, who reiterated his “trading buy” call on the stock, with a target price of RM5.05.

This article appeared in The Edge Financial Daily, November 23, 2009.