KUALA LUMPUR: While maintaining a defensive stance on the equity market in the near term due to volatility, Standard & Poor’s (S&P) Equity Research is keeping its preference for Malaysia’s banking and healthcare sectors and expects them to outperform.

Its vice-president Lorraine Tan said yesterday she preferred banks due to their anticipated steady earnings growth while healthcare was expected to see minimal impact from the global economic swings.

Demand for rubber gloves was also expected to pick up in the third quarter as inventory was drawn down, she said at a press conference following the release of S&P’s 2010 Mid-Year Market Outlook report.

“The sectors we like for quite a while now include the banks and healthcare, namely the rubber gloves. Both sectors, I’m happy to say, have done relatively well. They’ve outperformed,” she said.

However, Tan was cautious about external factors including lingering concerns of sovereign debt problems in the eurozone.

She was also concerned “bubbles” could emerge, particularly in China over non-performing loans and a risk that its government might engineer a “harder landing” to fend off inflation pressures.  

Year-to-date, Asian markets including Bursa Malaysia are in the red due to the fallout from the debt crisis in the eurozone and weaker US employment data. The FBM KLCI lost 8.12 points to 1,286.27 yesterday.

As for Malaysia, Tan said she believed the flow of projects would continue to support the local building materials and construction firms. The semiconductor sector had also done quite well despite the recent setback from the external factors.

She said the research house was maintaining its year-end target for the FBM KLCI at 1,400 as the 30-stock index was trading at 15 to 16 times 2010’s price-to-earnings ratio (PER).

“We note that given the recent market falls, upside to our target has improved to 9% from end-May’s closing,” she added.

Tan said that while the PER has improved, on a relative basis, the Malaysian market might lag regional bourses given its more defensive make-up and smaller decline recently.

Key risks included lingering concerns of sovereign debt problems in the eurozone and bubbles that could emerge, particularly from China over non-performing loans and a risk that its government might engineer a “harder landing” to lower inflation pressures.  

Tan also said buying opportunities exist in Asia, especially for “better managed” blue chips but cautioned that risks associated with eurozone debt and slowing demand might dampen earnings outlook.

She pointed out that S&P’s rating agency forecast a double-dip recession was unlikely to happen in the global economy while its economists saw a US economy recovering at a rate that was faster than they had anticipated.

On the overnight policy rate (OPR), Standard & Poor’s Malaysia Sdn Bhd director of equity research (Asia) Alexander Chia said Bank Negara Malaysia might raise the rate by 25 basis points (bps) each in the third and fourth quarters to bring it to 3% by year-end.

“We have seen two hikes this year and I think in terms of overall market consensus there could be at least another 50bps this year,” he said.

However, Chia said Bank Negara would monitor developments in the external markets and the global macroeconomic situation before raising the OPR.

He said the market had “priced in” the anticipated 50bps increase, thus it would not dent loan or hire-purchase demand and cause banks to fall short of such growth.

This article appeared in The Edge Financial Daily, June 8, 2010.