Support from strong growth outlook and positive market drivers
Longer term uptrend intact. The KLCI is now trading at 15 times 2010 earnings (above its post-crisis average of 14 times) and 1.8 times book value (above its post-crisis average of 1.7 times).
Following strong GDP growth in the last two quarters, we upgraded our projected GDP growth to 5% for 2010, a turnaround from -2.4% in 2009. Corporate earnings in the last two quarters have been upgraded by 6.7% for 2009 and 11.9% for 2010.
With that, we expect 2010 earnings to exceed pre-crisis levels. On the back of strong growth outlook and positive market drivers, the longer-term upward trend is intact. And riding on strong liquidity, multiples could be higher over the longer term.
Our end-2010 KLCI target of 1,448 is based on higher 16 times 2011 earnings, achieved in the 2007 upswing. KLCI's valuations remain higher compared to regional markets. This could result in Malaysia lagging regional markets. This could result in Malaysia lagging regional markets in an upswing.
That said, the stellar 50% gain from the March low is likely to result in intermittent profit-taking. In 1998 and 2001, the market rebounded by 26% - 136% over five months.
After the initial rebound, the KLCI corrected 15% - 20% over two months in both cases. In this recovery, the KLCI is up 50% from March, and the sharpest correction since was only a 6% drop. In 1998 and 2001, the market went on to reach new record highs, post-correction.
Ref: HwangDBS Vickers Research
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