Running ahead of fundamentals?

Running ahead of fundamentals?


Written by Ellina Badri, Isabelle Francis & Surin Murugiah
Tuesday, 28 July 2009 23:51

KUALA LUMPUR: Regional markets continued to rise on July 28, driven by high liquidity but some analysts caution that equities may have run ahead of fundamentals.

Some hint of profit-taking emerged as Japan’s Nikkei 225 snapped its nine-day run and dipped 0.01% to 10,087.26 points. European markets turned negative in early trade on July 28, dragged down by losses in energy stocks.

Hong Kong’s Hang Seng Index gained 1.84% to 20,624.54, Shanghai’s Composite Index added 0.09% to 3,438.37, South Korea’s Kospi rose 0.13% to 1,526.03, Taiwan’s Taiex Index advanced 1.62% to 7,142.63 and Singapore’s Straits Times Index was up 1.84% to 2,624.04.

Macquarie Research, in a report titled When depositors become investors on Monday, said liquidity was returning to Asia and global emerging markets.

It said the fund flow numbers for the week ended July 22 showed that liquidity returned to Asia, ex-Japan and global emerging markets with net weekly inflows of US$973.2 million (RM3.41 billion) and US$1.1 billion, respectively.
This reversed the net outflow trend of the past four weeks, it said.

It said Greater China (China, Hong Kong and Taiwan) funds saw their biggest inflows since December 2007 (US$213.3 million), adding that sentiment towards China remained positive, with investors looking to achieve a broad and diversified exposure.

“In our view, the market conditions continue to be driven by liquidity rather than fundamental factors. Importantly, foreign investors are not the only source of liquidity,” it said, adding that domestic sources were also playing an important role, as depositors were switching from time deposits to demand deposits.

“Interest rate differentials between time and demand deposits are narrowing. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (demand deposits),” it said.

The research house also said while liquidity conditions were often a function of economic fundamentals, in the very near term there was the obvious potential for more money to chase equities despite what it viewed as elevated valuations.

“The yield gap between the earnings yield and the deposit rate expanded to an historical high. Despite elevated valuations, the significant yield differential between equities and bank deposits could induce investors to continue to switch from bank deposits to equities.

“Retail participation could rise further. The low returns on alternative investments, such as bank deposits, as well as the strong market momentum, were two likely drivers of the increase in retail investor participation,” it said.

Macquarie said the strong liquidity was pushing Asian equities to stretched valuation levels.

“We think a strong recovery in global final demand is now priced in.

“While hard signs of demand recovery are absent, we would ‘lean into’ the current rally, progressively reducing beta as equity markets move further and further away from levels justified by economic fundamentals,” it said.

On Malaysia, Macquarie said the yield gap, which it defined as 12-month forward earnings yield minus demand deposit rate, had widened further. “Admittedly, the domestic monetary base could be the next potential source of liquidity driving up the market,” it said.

Scott Lim, MIDF Asset Management chief executive and chief investment officer, agreed that the market was liquidity-driven, and valuations were getting stretched.

“The bulk of the rally has reflected liquidity more than fundamentals. Apart from liquidity and efforts by governments to increase access to financing, there is nothing much else driving the market.

“Investors have grounds to be cautious. Either fundamentals have to catch up with valuations, or valuations have to come down to meet it. Either one has to give,” he said.

Lim added that the liquidity was trying to rebuild a bubble, potentially the biggest one of all, but certain markets such as China were showing they were ready to stage a fierce formation of a stock market bubble.

However, Merrill Lynch Global Wealth Management Asia-Pacific investment strategist Stephen Corry said the next six months would still present buying opportunities in equities, regardless of it being an extended bear market rally or the start of a new bull market.

Corry was bullish on emerging market stocks, driven by recovery numbers in terms of car sales, while financial stocks remained favourites.

However, he cautioned that strong corporate earnings growth would need to be supported by equities’ current valuations.

Light crude oil rose nine cents per barrel to US$68.47 as at 6.20pm. Crude palm oil futures for third-month delivery gained RM42 per tonne to RM2,140.

At Bursa Malaysia, the FBM KLCI jumped 1.38% or 15.95 points to 1,172.38, its highest level since July 1 last year, led by gains by blue chips.

TA Securities technical analyst Stephen Soo said the immediate resistance level was 1,188 with the next level at 1,200. He said the respective support levels would be 1,165 and 1,148.

Turnover rose to 1.12 billion shares valued at RM1.63 billion. Gainers led losers by 491 to 194, while 249 counters traded unchanged. Market capitalisation over the last 12 trading days increased by RM60.48 billion to RM876.75 billion. The FBM100 [] gained 100.83 points to 7,689.37 and the FBM Emas added 103.69 points to 7,905.20.

Among the major gainers, SIME DARBY BHD [] and UMW HOLDINGS BHD [] added 25 sen each to RM8.15 and RM6.30, IOI CORPORATION BHD [] was up 22 sen to RM5 and GENTING BHD [] gained 15 sen to RM6.70.

MALAYAN BANKING BHD [], BUMIPUTRA-COMMERCE HOLDINGS [] Bhd and PUBLIC BANK BHD [] rose 10 sen each to RM6.55, RM10.20 and RM10.40, respectively, while Genting Malaysia Bhd added 12 sen to RM3.

PPB GROUP BHD [] was the top loser, shedding 20 sen to RM14.30; KFC HOLDINGS (M) BHD [] fell 15 sen to RM7.35, TALIWORKS CORPORATION BHD [] lost 13 sen to RM1.61, while LOH & LOH CORPORATION BHD [] and LEBAR DAUN BHD [] fell 12 sen each to RM4.18 and 60 sen.

KNM GROUP BHD [] was the most actively traded stock with 56.8 million shares done. It fell one sen to 89.5 sen.


From the Edge Malaysia