Thursday, 28 January 2010

AmResearch: Cyclical bull rally has not prematurely ended

AmResearch: Cyclical bull rally has not prematurely ended

Tags: AmResearch | corporate earnings | cyclical bull rally

Written by AmResearch
Thursday, 28 January 2010 14:30

KUALA LUMPUR: AmResearch Sdn Bhd believes there is more upside for the local stock market and from a fundamental standpoint; it does not think the cyclical bull rally in the market has prematurely ended.

It said on Thursday, Jan 28 that for Malaysia, it expects gross domestic product to rebound by 5.7% in the first quarter 2010 (1Q10) and rise by a further 4.7% in 2Q10 before moderating to below 3% in the last two quarters of this year - as the low base effect tapers off.

“Historically, market performance has been strongest when GDP accelerates, underpinning a macro backdrop for corporate earnings - to expand at an even faster pace than our current estimate of 25% for 2010 (2009: -2%),” it said.

AmResearch retains its fair value of 1,450 for the FBM KLCI, based on 2010’s PE of 16.5 times or one standard deviation above its mean of 14.5 times.

Market should trade above its long-term average because corporate earnings growth of 25% set to rise this year is already more than three times the historical average growth rate of just 7% per annum.

“This market correction, therefore, presents an opportunity to accumulate quality stocks,” it said, adding several “high-beta” stocks on its Buy list that have been sold down in recent days are CIMB, IJM Land, Tenaga Nasional, Ann Joo Resources, AirAsia, Unisem, MPI and Genting Group.

To recap, it said that in recent days, the market rally has been somewhat destabilised by policy tightening surprises in China where it again moved in to curb banks from lending.

The FBM KLCI retraced 43 points (down 3%) on Wednesday from its recent peak of 1,308 on Jan 21 with risk aversion resurfacing.

It said the issue was whether this correction signaled the beginning of a valuation de-rating or a transitory mid-cycle pullback due to profit taking after a strong start since early this year.

AmResearch said it appears unlikely that China’s policy tightening will undermine its economic growth (4Q GDP: 10.7%) and by extension, de-rail the global economic recovery already gathering pace. Its baseline view is that the macro momentum remains robust.

“We continue to believe that the cyclical economic upswing will be most significant in 1H 2010, given a depressed base last year,” it said.

For Malaysia, its analysis of previous earnings-driven rally from trough to peak - in 1998/1999 and 2001/2002 - also indicates that an uptrend has never been shorter than 12 months.

The rallies in 1998/1999 and 2001/2002 sustained for 16 months and 12 months; respectively. Corporate earnings rebounded by a strong 36% in 1999 after contracting 20% in 1998. In 2002, corporate earnings accelerated by 24%, from just 3% in 2001.

“We are only just 10 months from lows seen in March 2009, and corporate earnings are still expanding with upside bias. To be sure, the previous earnings-driven rally from trough to peak - in 1998/1999a and 2001/2002 - was also punctuated by three mid-cycle corrections. Pullback was transitory, stretching no longer than two months. Dips were 15% to 22% off intermittent highs,” it said.

AmResearch said a 15% pullback from the market’s recent high of 1,308 means that it might form a base at 1,112 (or a 2010’s price-to-earnings of 12.8 times), implying a potential downside risk of 12% from the current 1,265.

However, the flipside is that the market will correct to 1,112, if it materialises. This would imply that an earnings-driven rebound to our fair value of 1,450 would also produce an attractive potential return of 30%, outweighing a downside risk of 12%.

“Thus, even though trading conditions might remain volatile at least until concern of policy risk dissipates, the upside potential is greater than downside risk,” it said.

It remained committed to its view that profit drivers - particularly for cyclicals - auto, banks, CONSTRUCTION [], property, transport and TECHNOLOGY [] and media are solidifying as end-demand and margin recovery kick-in to accentuate an earnings rebound.

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