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Wednesday, April 8, 2009

Strategy to Invest in Bursa Malaysia


Odds improving for region. As the jury is still out on whether this is a bear market
bounce or the start of a sustainable uptrend, we recently looked at whether regional
markets have performed in line with macro fundamentals. Trough valuations seen in
this bear market appear to be consistent with the macro outlook. Economic
indicators are expected to turn positive in 4Q09 as most of the monetary and fiscal
stimuli are likely to filter through by 3Q09. This should translate into a 2Q09 entry
point. If we wait for a post-rally window-dressing correction of 10-15%, the riskreward
ratio should move to 90:10, enhancing the odds of a profitable outcome.

• Political succession effect. Domestically, there are reasons to be more optimistic.
Dato’ Sri Najib Tun Razak will take over as prime minister shortly and will soon
unveil his cabinet. He will also be spelling out his vision for Malaysia and the
changes needed for Umno and the National Front coalition to stay relevant.
Historically, the market performed strongly in the 3-6 months before and after
changes in PMs. Given the lacklustre market performance in the run-up to this
handover, the post-handover succession effect could be stronger than expected.

• Foreign selling at tail end. Foreign funds have been persistent net sellers of
Malaysian equities over the past 12 months. Based on EPFR, foreign funds sold
down close to US$4bn or 40% of their Malaysian positions over the past year, much
higher than the 11-16% net disposals for other markets. The selling, however,
appears to have let up in the last couple of months. Considering the very high cash
level held by all funds, a reversal of the trend should give the market a big fillip.

• Climax of bad news in 2Q? In view of the high base, we expect more earnings
downgrades during the 1Q09 results season in May, making it the 5th straight
quarter of earnings letdowns and probably taking us to the tail end of downgrades.
In Apr/May, we are also likely to downgrade our GDP growth forecast for 2009 to a
sharper contraction. If the negative fundamental news sparks weakness in share
prices, investors should use this opportunity to accumulate positions. We expect
bad news on the economy and earnings to peak in 2Q.

• Upgrade to OVERWEIGHT. In addition to the fundamental reasons listed above,
Malaysia looks ripe for a rebound from a technical charting perspective. We
upgrade Malaysia from Neutral to OVERWEIGHT and raise our year-end KLCI
target from 1,013 to 1,060 points (based on 13.5x P/E) after cutting the discount to
the 3-year moving average P/E from 15% to 10%. On a regional basis, we believe
this is a hedged bet. To maximise returns in the 2H recovery, investors should
move away from defensive sectors to beaten-down cyclical sectors such as
construction. Our top-5 picks are Gamuda, MRCB, Lafarge, Kencana and Resorts

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