Market Commentaries & Technical Analysis

Investment Theme For 2009

*** UNCERTAIN ***

1. Privatization And M&As Deals

2. A Stronger Ringgit Policy

3. Implementation Of the Ninth Malaysia Plan

4. Asset Reflation Theme

5. Iskander Development Region (IDR) In South Johor

6. Eastern Corridor Development Programme (Petronas-Led)

7. Northern Corridor Economic Region

8. Sarawak Region Corridor

9. The Sabah Development Corridor

10. Sarawak Corridor of Renewable Energy (Score)

11. RM40 Billion Public Transport Expenditure

12. The Asia Petroleum Hub In Johor

13. The Solid Waste Management Play

14. Flow of OPEC Petrodollars

15. The Trans-Peninsula Pipe Project

*** UNCERTAIN ***

16. Water & Water-Related Play

17. A U-, V-, W- Or L-Shaped Global Economic Recovery

18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings

19. The Economic Stabilization Plan & Mini Budget

20. Interest Rate Cycle (Speculating End Of Easing Cycle As Economy Recover)

21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)

22. Liberalization Of The Services/Financial Sector

23. The Malaysian Government’s Reform “Train”

24. GLCs Revamp

25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)

26. A ‘Third Stimulus’ Package (Uncertain)

27. Market Liberalization (Paring Down In GLCs’s Stake)

Watch List In The Coming Week

1. 2010 Budget Announcement On 23 Oct 2009;

2. Refinement To The National Auto Policy In Oct 2009

3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension)

Market Commentaries

It’s been a good run on the local bourse, but before the FBM KLCI can tirelessly speed up to the next pit stop, it needs a much needed breather before positioning for its bullish lap.

After heading north over the last six months (April 2009 – Sept 2009), and gaining 38.5% on a year-to-date (Sept 2009) basis to 1,214, it is no surprise that some resistance has emerged.

The FBM KLCI has been encountering strong selling pressure, ever since it penetrated the heavy psychological resistance level of 1,200.

The short-term negative technical reading is pointing towards a further pullback. Hence, the index may retest of the 10-day simple moving-average of 1,211 and the 1,200 psychological support soon.

Another source of concern is the Shanghai Composite Index which has broken below its short-term 30-day red moving-average line. If the Shanghai market does not break back above this short-term dynamic resistance, it could trigger an increased level of profit-taking activity among regional markets, particularly our local FBM-KLCI.

Investors are advice to be prudent and taking a little money off the table, especially with such significant gains in recent times. Moreover, Marc Faber said he would not be surprised if we have seen the peak of the market for this year (2009) because economic news is not going to improve very much.

Trading volume on the local bourse was thin during the three days as most investors were still away on the Hari Raya. Some institutional fund managers, especially government linked funds were still on Hari Raya leave.

Apart from the holidays, the lack of buying interest also contributed to low trading volume last week. The market is getting tired of the recovery story. It is at a crossroads now, awaiting fresh catalysts. Many institutional investors are on the sidelines.

Some view the market is that current valuations look a bit rich now. As a result, the market is due for correction. On the other hand, due to ample liquidity could lift the market further.

The bigger picture, however, remains positive.

In the coming weeks (Oct 2009), newsflow on new construction projects such as the RM1bil low-cost terminal and the RM7bil LRT extension will start to filter through.

Also, speculation on potential policy measures in the upcoming 2010 Budget on Oct 23 2009 could give the market a boost in the coming weeks.

Pending any tangible bearish signs, positive outlook for the FBM-KLCI remains after this wave of profit-taking activities. Owing to the absence of major negative catalysts, the index should be able to sustain above these support levels for now (Sept 2009).

Investors are advice to track the leads from Wall Street and the development of the G-20 summit in Pittsburgh to assess near-term market conditions.

The potential share placements by government-linked companies such as Khazanah Nasional Bhd as a win-win proposition for Malaysia as they improve the free-float and liquidity while giving investors the opportunity to ride on the upside of the market. Placements can also help renew foreign investor interest and drive a re-rating of the market.

By CIMB … It maintains end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price/earnings of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.

Technical Analysis

The support line for FBM KLCI is pegged at around 1,200 to 1,210 points, with immediate resistance at 1,220 - 1,240 points. The breakout level is marked at around 1,190 to 1,195 points.

The FBM KLCI may hit its saturation zone at 1,237.25 to 1,248.34 soon, before risks to the downside increase greatly. Investors are urged to remain cautious at the present (Sept 2009) “lofty” levels that the local stock market have attained.

The ample share placements and off-market deals that have been happening in the background, arguing that these are obvious pre-cursor to an impending market correction.

With market breadth and volumes shrinking, coupled with the emerging weak and bearish technical signals, it is just a matter of time before the benchmark index heads south. Thus, he advises investors to trade with a short-term time frame.

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After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.

A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.

The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.

Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.

Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.

Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.

The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.

Undermining Factors

1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);

2. Malaysia Political Uncertainty;

3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);

4. Volatile Foreign Exchange Market;

5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);

6. Commodities Prices (Strengthening);

7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation

8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises

1. Terrorist Attack –

2. Oil Supply Disruptions –

3. A Pandemic Disease – Swine Flu

4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;

5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Leg Global Recovery (Sept 2009 Onwards) !!!

Recession – Recovery – Growth – Boom - Burst

(Transition From One With China As Sole Driver To A More Balanced US/China Model)

a. Global Inflation Outlook: Controlled Versus High

b. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009

c. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA

d. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed

e. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …

f. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity

g. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model

h. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery

i. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY

j. What’s NEXT For The US & China Equities Market

k. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water

l. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.

m. What’s NEXT (2H2009) For The Malaysian Equities Market …

n. Carry Trades Are Making A Come Back Into Emerging Markets

o. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

a. Global Inflation Outlook: Controlled Versus High

The very worst of the economic downturn is now (Sept 2009), almost certainly, behind us. Across the world, investors are cautiously emerging into the faint sunlight of a new economic dawn, and starting to hope for the best.

But even as we start to experience optimism (or less pessimism) about the future, a fear is also fermenting. The fear of higher inflation has been unleashed.

Most professional economists, including those of the world's main central banks, do not think inflation will be a problem for the advanced economies of the world. The range of views from investors is very wide, however. Some investors think that a Japan style deflation is imminent. Some investors believe inflation will tip into hyper-inflation (a view where the only sensible investment strategy could appear to be to stock up on canned food and bottled water, as normal economic activity collapses).

First, it is worth thinking about the sort of inflation ranges that are "controlled" versus "high". Generally speaking, if inflation averages about 2.5 percent or 3 percent over a period of a few years, economists consider the pricing environment to be "controlled".

This suggests that inflation should not go too far above 5 percent -- for were it to do so, investors and workers would question whether in fact inflation would continue to revert back to its long term average. What policy makers need to avoid is "high" inflation - numbers that go above 5 percent and then stay there.

What is wrong with higher levels of inflation? The main risk is that higher inflation would add an element of uncertainty to economic markets. If, after years of relatively well behaved inflation pressure, prices start rising more rapidly, investors would become uncertain about the future path of inflation.

At the moment, investors can assume that over a period of some years inflation in the major economies will average out around 2.5 percent to 3 percent. If something happens to challenge that assumption, investors will want an appropriate insurance premium. If an investor feels that inflation could rise as high as (say) 10 percent, they will demand compensation for that risk. This risk is what economists call "inflation uncertainty risk". Inflation uncertainty risks runs as high as 1 percent to 1.5 percent, and it is an addition to the cost of borrowing money.

This is where the real danger of inflation comes in. If the cost of borrowing money rises, companies will borrow less. If companies borrow less, they will invest less. If companies invest less, they will be less efficient - and if companies are less efficient, the economy overall is less efficient. In other words, if high inflation increases inflation uncertainty risk, economic growth is almost bound to suffer.

High inflation will also add to government debt burdens. This often seems counter-intuitive (people talk about governments "inflating away" debt), but in fact government debt is five times more likely to rise or hold steady than it is to decline under a high inflation environment. This is because governments need to refinance their debt frequently.

Around 55 percent of the US national debt has to be refinanced in the next two years (2010-2011). If the US government were to create inflation, bond investors would punish the US Treasury by raising bond yields faster than inflation increases (and the increased debt service cost would increase government debt levels).

Why is inflation likely to remain contained? There are two good reasons to suppose that inflation will remain under control:-

· First the world economy has plenty of spare capacity at the moment. Factories sitting idle, unemployed workers - these are resources that can be called upon as growth starts to recover. Any pressure for prices to rise will be held in check by using this pool of under utilized resources.

· Second, give central bankers some credit. The world's monetary authorities have spent three decades (1970s-2000s) controlling inflation. They know how to keep inflation in check, and (at least in recent years) they have tended to be rather good at achieving their policy objective. Central bankers understand that inflation generates high economic costs. As a result, expecting policy makers to respond appropriately to any signs that inflation is going to be too high.

What about commodity prices? Certainly commodity prices could rise as the world economy recovers (in particular, as emerging markets recover). However, commodity prices are only a small part of final inflation for most developed economies.

Around 70 percent of US inflation is actually caused by (domestic) labor costs, for example. Commodities contribute around 15 percent of US final inflation. As long as labor costs are held in check by spare capacity, major economies are likely to continue to enjoy low inflation.

Commodities are more of a threat to emerging market inflation rates (as commodities tend to have a higher weight in inflation calculations for emerging markets). But even taking that into account, inflation is not likely to be an economic concern in the months(Oct 2009 & Beyond) ahead.

b. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged, Why Dollar Is Weak Since Aug 2009 …

The US Dollar Carry Trade …

For years (1990s-2000s), the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place (Sept 2009)?

Negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade (1990s).

This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency. The dollar is the new yen.

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

The low-yielding yen, and to a lesser extent the Swiss franc, were the most widely used as funding currencies, pushing them down to multi-year lows against a raft of currencies as risk appetite was supported by an abundance of liquidity and rallying asset markets. Indeed, both currencies rallied sharply as turbulence on global markets erupted last autumn (2008) and forced investors to unwind their positions.

But rather than lose their value as asset markets have shown renewed signs of strength and risk appetite has improved in Sept 2009, both the yen and the Swiss franc have rallied against the dollar. Indeed, the dollar fell to a seven-month low of Y90.18 against the yen in Sept 2009 and on Tuesday hit a one-year low of SFr1.0318 against the Swiss franc. The dollar has not just been weak against the yen and Swiss franc, however.

There is a change in dynamic that has made the dollar a more attractive funding currency to explain its recent fall.

The Marriage of The Dollar And Oil Is Growing Estranged …

Their divergence has snapped a longstanding correlation, for the time being at least (Sept 2009). A weakening dollar generally accompanies higher oil prices. The relationship has a solid basis. Oil is bought and sold in dollars, forcing exporters to raise prices to compensate for a less potent currency.

Higher crude prices also worsen US trade balances, pressuring the dollar. Investors concerned that quantitative easing will lead to runaway inflation and debased currencies have also flocked to commodities as a hedge.

Many are expecting a continuing decline in the dollar, combined with reinvigorated oil demand, will push oil prices higher. For now (Sept 2009), an amply supplied oil market is repelling any price support from the currency.

Now (Sept 2009) that expectations of an economic recovery are widespread, we are back to people recognising the size of the US debt and ... fiscal deficits and back to the flight from the dollar.

Because there isn’t enough of a rebound of real demand for oil and stockpiles have accumulated, we’re not seeing a spike in oil prices yet.

In the past, some big exporters have called for oil to be denominated in a basket of currencies to blunt the impact of dollar weakness, but to little avail. The main variable to consider is the import structure of oil producing countries. If they have to buy most of their imports in US-dollar denominated prices, probably they will prefer to keep oil US denominated.

While official US interest rates, such as those in Japan and Switzerland, are moored at levels close to zero, it is the rates on offer in the interbank market that are crucial in determining the profitability of carry trade strategies.

In Aug 2009, three-month dollar Libor lending rates fell below those of the yen and later dropped below those of the Swiss franc for the first time since November 2009, effectively making the dollar the cheapest funding currency.

Indeed, at just 30 basis points, three-month dollar lending rates are falling towards levels that led to two waves of yen-funded carry trades that weighed on the Japanese currency between 1996 and 1998, and then between 2001 and 2008.

Why Dollar Is Weak Since Aug 2009 …

The usual explanation for dollar weakness over recent months (Aug – Sept 2009) has been an improvement in risk appetite. This weighs on the dollar as emboldened investors sell the currency to fund investments in higher-yielding assets elsewhere.

But this fails to adequately explain the secular drop in the dollar in recent weeks (Sept 2009). Indeed, it is not clear that there was actually much further improvement in risk appetite in Sept 2009.

A likely explanation for the drop in the dollar is that it is increasingly becoming a favoured funding currency, taking over the mantle from the yen. This is likely to continue to put pressure on the dollar: Ultra-low interest rates suggests that the dollar will remain under pressure for a while yet, especially as the Federal Reserve continues to highlight that US interest rates are not going to go up quickly.

Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent (Aug – Sept 2009) deterioration in dollar sentiment. According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars in Sept 2009 rose to their highest levels since July 2008, when the dollar hit a record low against the euro.

The fact that high-yielding currencies have rallied for most of this year (Till Sept 2009) while the traditional carry trade funding currencies – the yen and the Swiss franc – have not weakened throws up one of two conclusions.

Either the carry trade has not returned and high-yielding currencies are strong in spite of any yield attraction, or another currency has supplanted the yen and the Swiss franc as the funding currency of choice. If this is the dollar it could imply that the greenback is in real danger.

It is certainly possible given the dollar’s weakness, negative positioning, and the fact that short-term US interest rates are down to Swiss and yen levels that the dollar has assumed the position of the carry trade funding currency of choice.

c. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA

By Nomura … Sept 2009

Taking a cue from the past post-crisis rallies and historical earnings upgrade cycles, it remains bullish. Economic recovery should continue to underpin earnings upgrades, supported by ongoing stimulus spending.

From a regional perspective, however, Malaysia could lag as cyclical markets elsewhere offered better returns.

Nomura noted that in the past 1997/1998 Asian financial crisis, banks had rebounded by over 200 per cent over a 12-month basis.

By Morgan Stanley … Sept 2009

The Malaysian market has developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, despite having generally fallen by the wayside amid structural issues in the economy.

Nevertheless, from a macro perspective, it still expected Malaysia to deliver a reasonable growth outlook in 2010. Its 2009 and 2010 forecasts of -3.5% year-on-year (y-o-y) and +4.3% y-o-y respectively, are below consensus’ -3% y-o-y for 2009 but in line with the +4.3% y-o-y for 2010. It sees 2011 growth at 4.8% y-o-y.

However, it noted a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, it does not sense the same sentiment with Malaysia despite Malaysia being the second-most exposed to global trade within Asean as well as a commodity play.

The three-legged growth model of manufacturing trade, commodity trade and the public sector economy was useful in assessing the Malaysia outlook.

Trade was slowly but surely turning around as manufacturing faced the same amid an inventory snapback. Manufacturing production has already picked up ahead of trade amid a lesser pace of destocking in 2Q09. On a three-month moving average basis, exports had shown some second-order derivative. The US ISM New Orders Index (which leads by about four months) showed that a more evident turnaround was in the pipeline.

Malaysia, being the top net commodity exporter (mainly of oil and crude palm oil) in Asia, was poised to be the biggest beneficiary of higher prices. Limited global spare capacity and El Niño weather conditions could keep crude oil and edible oil prices supported at elevated levels.

Commodity trade aside, the large natural resource endowment also helps to fill government coffers in terms of revenue. Revenue from commodities constitute about 40% of total government revenue, which in turn helps to support what is one of the largest public sector economies within Asia.

Expecting government expenditure to pick up further on a sequential basis as spending tended to be back-end loaded in the second half (2009) of the fiscal year.

While Budget 2010, to be delivered on October 23 2009, would be less expansionary, expecting Malaysia to have one of the highest fiscal deficits within Asean for next year (2010).

Global backdrop and the political climate as two key risks for Malaysia.

As it is, Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness.

Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy.

Beyond the cyclical turnaround in 2010-11, structural gaps needed to be addressed in the longer term. Malaysia faces a ‘Dutch Disease’ of sorts, in its view”. It refers to the phenomenon where the commodity resource sector displaces the export manufacturing sector.

When commodity exports augmented the current account balance either due to a commodity boom or new supply discovery and real exchange rates appreciated, the manufacturing export sector suffered.

Capital and labour shift into the commodity sector due to its profitability and as manufacturing competitiveness erodes. Factor inputs also move towards production of non-tradeables to meet the increase in domestic demand.

Excess domestic demand from positive terms of trade could also lead to real currency appreciation, which further de-industrialises the economy. The benefits of technological know-how and productivity growth from manufacturing would whittle away and macro vulnerability to the commodity sector increased.

Malaysia’s real effective exchange rate appreciated by a maximum of 11% between 2005 and mid-2008, suggesting that there could be some causality from the Real Effective Exchange Rate (REER) to the competitive erosion of the manufacturing export sector.

The growth buffer in a young labour input and commodities trade had reduced the sense of urgency to increase competitiveness (productivity) and allowed inefficiencies like the affirmative-action policy to go on for longer.

Indeed, hard infrastructure standards are relatively high as the government spends sizeable amounts on construction but soft infrastructure gaps have persisted. The upshot remains the same — a competitive erosion in exports and FDI that could serve to undermine the economy.

Despite the benign global conditions, Malaysia’s trade surplus of machinery and transport equipment fell from US$10.5 billion in 2000 (11.2% of GDP) to US$9 billion in 2008 (4.1% of GDP). In comparison, the trade surplus of China (-US$9.3 billion to US$231.3 billion), Korea (US$41.2 billion to US$119.1 billion), Taiwan (US$19 billion to US$45.1 billion) and Singapore (US$11.2 billion to US$22.9 billion) all saw a positive delta between 2000 and 2008.

Machinery and transport equipment constituted about 49% of Malaysia’s total exports and Malaysia’s global share of these exports declined from 2.3% in 2000 to 1.7% in 2007 after China joined the WTO and saw its global share increase from 3.1% to 11.6%.

Specifically within the machinery and transport equipment segment, telecommunications equipment (from 4.5% in 2000 to 2.4% in 2007) and electronic data processing/office equipment (5.6% in 2000 to 5% in 2007) saw the most pressure in terms of declines in global share.

As net FDI in certain economies in the region (China, India, Singapore, and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory. Net FDI (4Q trailing sum) stood at -3.8% of GDP in June 2009 from +2.4% of GDP in June 2004.

Execution of the government’s reform measures would be key as the policy intent behind them served to arrest the structural weakness in the economy. Investors will now (2009) be closely watching for the government’s ability to execute on these measures.

By CLSA Asia-Pacific Markets … Sept 2009

It has described Prime Minister Datuk Seri Najib Tun Razak’s current positive economic and social reforms as "Najibnomics", given his economics background.

With his background on industrial economics from the University of Nottingham, Najib had been quick to effect various fiscal, government and structural reforms.

They include liberalising the New Economic Policy, ensuring greater transparency, speeding up the award of government infrastructure projects and improving ties with Singapore to draw more foreign direct investments into Iskandar Malaysia, a development region in Johor twice the size of Singapore.

In its special strategy report on Malaysia, Najib had covered good ground since taking office on April 3 2009 with a number of positive policies and actions aimed at stimulating the local economy, attracting foreign investments and foreign talent, reducing bureaucracy, tackling crime and corruption, effecting greater accountability and promoting national unity (through the 1Malaysia concept).

Although he has until March 2013 to call for the next general election, he has little choice but to work quickly as the clock is fast ticking. Najib not only has to implement new policies to reform the government and turn around the economy simultaneously, he has to deliver some decent results to ensure that the ruling Barisan Nasional coalition performs better than in the last general election in March 2008.

On the economic front, expecting the Malaysian economy to recover in 2010 while consumer sentiment was also improving.

In view of Malaysia's high savings rate at 43.3 per cent of the GDP which would support private consumption while the impact of weak imports from Western countries would not be too severe, it pointed to an economic recovery next year (2010).

Malaysia's 2009 GDP has been forecast to decline by 4.0 to 5.0 per cent this year (2009) compared to a growth of 4.5 per cent last year.

CLSA's expectations are in line with that of Bank Negara Malaysia which indicated that the country's growth outlook for the second half of 2009 is expected to improve after the economy contracted at a slower rate of 3.9 per cent in the second quarter of 2009 following a 6.2 per cent contraction in the Q1 2009.

The central bank said there were increasing signs that conditions in the global economy were stabilising as the pace of the decline in economic activity was moderating in advanced countries.

There has not been any high-profile debt default while non-performing loans in the banking system remain benign. Companies have merely been hit by shrinking revenues, thinning margins and higher receivables, while corporate governance issues have been sporadic. Most companies believe that the worst is over. Having said that, they do think the way forward will remain challenging as unemployment continues to creep up.

In terms of household income, 44 per cent said they experienced a decline in income while 10 per cent experienced an increase.

About 70 per cent said they had changed their spending patterns, reducing expenditure on food, clothing as well as leisure. Essentials like mortgages, utilities, transport, children’s education, healthcare and communications had been largely unaffected by the downturn.

By AMBank … Sept 2009

The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright.

It had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Anticipating a correction phase in the third quarter of 2009 “may be behind us,” or at least “the risk of pullback was dissipating.”

There were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.

More importantly, macro fundamentals are now (Sept 2009) pointing towards a start of a growth cycle moving into the fourth quarter 2009. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon.

It is forecasting gross domestic product to expand by 3% in 2010.

Historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months. Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound (April 2009 – Sept 2009) is just six months from lows.

It has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009. It expects the revision cycle to gain traction. Earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

By Kim Eng Research … Sept 2009

There were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.

The stock market has risen 33% year-to-date (Sept 2009) but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

Opine that it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points.

d. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed

By Treasury Secretary Timothy Geithner …

Citing emerging financial sector stability, a number of government rescue efforts in place since the Wall Street crisis are no longer needed and that banks will repay US$50 billion in rescue funds over the next 18 months (Sept 2009 & Beyond).

US still has a ways to go before "true recovery takes hold. But improved conditions in the banking industry have prompted Treasury to begin winding down emergency support programs implemented after the collapse of Lehman Brothers last year (2008).

The cautious but upbeat tone reflects a growing push by the administration to present the government financial rescue efforts as a success amid lingering public apprehension about the economy.

Banks have already paid back $70 billion of the $250 billion that the government injected over the past year (2008) to boost their liquidity. Only $11 billion of that infusion has occurred since he became Treasury secretary earlier this year (2009).

A major Treasury program that had been used to guarantee up to $3 trillion in money market mutual fund assets would be closed down on schedule on Sept. 18 2009. The program had no direct cost to taxpayers and actually earned more than $1 billion in fees paid by the mutual fund industry.

A series of emergency program initiated by the Federal Deposit Insurance Corp. and the Federal Reserve have also begun to phase out.

Still, unemployment stands at 9.7 percent and administration officials say it could rise to 10 percent in the coming months (Sept 2009 & Beyond).

Foreclosure rates are surging and the mortgage market remains tight. Geithner acknowledged that the economy would still face "more than the usual ups and downs."

By Warren Buffet …

The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now (Aug 2009) pose threats to the world’s largest economy and its currency.

The “gusher of federal money” has rescued the financial system and the U.S. economy is now (Aug 2009) on a slow path to recovery. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”

The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system.

The U.S. budget deficit is forecast to reach a record $1.841 trillion in the year that ends Sept. 30 2009.

Enormous dosages of monetary medicine continue to be administered and, before long, the US will need to deal with their side effects. For now (Aug2009), most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year (2009), while net debt will increase to 56 percent of GDP

The U.S. budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for July 2009. The excess of expenditure over revenue for July 2009 climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history.

Officials must still do “whatever it takes” to get the U.S. economy back on its growth momentum. Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with its growth in resources.

With government expenditures now (Aug 2009) running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

The dollar will weaken as the swelling U.S. deficit erodes its status as a reserve currency. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

By The Fed … dated Sept 2009

The Federal Reserve upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession, while reiterating its promise to hold interest rates very low for a long time.

The Fed would slow its purchases of mortgage debt to extend that program's life until the end of March 2010, in a move toward withdrawing the central bank's extraordinary support for the economy and markets during the contraction.

The U.S. central bank, as widely expected, held its benchmark overnight lending rates at close to zero percent.

The Fed said that information received since the Federal Open Market Committee met in August 2009 suggests that economic activity has picked up following its severe downturn.

U.S. government bond yields ended lower on the news that the central bank had reiterated a pledge to keep rates ultra-low for an extended period.

The Fed would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets as the Fed has been the biggest buyer. But it made clear it would purchase the full amount of US$1.25 trillion in agency mortgage-backed securities.

The U.S. central bank on Wednesday played down concerns about price pressures in an economy where the jobless rate is at a 26-year high and factory capacity is greatly underutilized.

e. The Good, The Bad And The Ugly Aspects Arising Since Sept 2008 …

The demise of the venerable Lehman Brothers September 2009 marked a defining moment for the world’s financial and economic systems. But the crisis did not last as long as expected, there are understandably structural changes going on in many countries as they adapt to the new economic realities.

The Good

i. Improving Outlook ...

The global economy is responding well to the massive injection of government spending worldwide.

It is generally perceived that the downturn has bottomed out about six months ago (March 2009). There are now (Sept 2009) some clear signs that recovery is on the way for most countries, though the process remains gradual and vulnerable, and some economists are arguing about the sustainability of those comforting indicators.

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn (Sept 2009) said a recovery of the world economy could occur earlier than expected, at the beginning of next year (2010).

The global financial institution has recently revised upwards its forecasts for the global economy. It now (Sept 2009) expects the world economy to shrink 1.3% this year (2009), a tad better than its earlier projection of 1.4% contraction, before growing again at 2.9% next year (2010), compared with its 2.5% growth projection earlier.

ii. Asia Leading ...

Asia seems to be leading the global recovery process. Most economies in this region started turning around in the second quarter of the year (2009). Malaysia’s gross domestic product (GDP) is expected to post growth by the fourth quarter of 2009.

The quick rebound of Asia seems to support the long-prophesied rise of the region as the next economic power. Economists are arguing that the crisis has accelerated the tectonic shift in world economic power to the emerging markets of Asia, in particular, China.

Asian economies suffered a downturn arising from the financial crisis due to the collapse in exports demand from industrialised economies that were going through a deep recession.

Exports demand for Asian goods is still sluggish till this day, but the Asian economies are improving faster than expected, thanks to the expansionary packages that are stimulating domestic demand.

iii. New Platform ...

Asia is coming to grips with the fact that external demand will most likely remain in the doldrums for a long time, as consumers in industrialised economies become more frugal. Hence, the export-dependent region has been displaying a sincere desire to shift to a new economic model – one that is more inward-looking.

Efforts are now (Sept 2009) moving towards boosting domestic consumption for sustainable growth. This may take some time as such efforts would involve ideology changes – that is, from the present (Sept 2009) “save more, spend less” to “save less, spend more”.

The Bad

i. Inflation Threat ...

The economy bouncing back from the trough has brought with it a quick, perhaps too soon, rebound in the global crude oil prices, which are currently (Sept 2009) hovering around the US$70 per barrel level, compared with less than US$40 per barrel at the end of last year (2008).

This gives rise to the risk of inflation, which could jeopardise the nascent recovery process. Nevertheless, the inflation risk at this stage remains subdued, as most countries are still in a deflationary stage.

Technically, Malaysia too seems to be experiencing a deflation as indicated by its consumer price index (CPI). The negative CPI for the third consecutive month in August 2009 gives the impression that the general price level of goods in the country has fallen, but as we are well aware, this is not the case.

The negative CPI is more reflective of the decline in fuel prices over the past one year (2008). But in general, the prices of most goods remain sticky since they were raised in tandem with the steep rise of fuel prices in July 2008r.

To be cautious, the current (Sept 2009) environment of low interest rates provide room for inflation to seep in. So, central banks could raise interest rates earlier than expected to rein in the risk of inflation.

ii. Bubbles Forming?

The expansionary monetary policies are feeding cheaper funds into the economy. While liquidity remains comparatively tight in most industrialised economies, emerging markets in Asia are flushed with liquidity.

Financial experts are now (Sept 2009) warning of potential asset bubbles, especially in property, forming in Asia. Liquidity in the region is far too abundant for policymakers to keep interest rates at their current (Sept 2009) lows.

Low growth and the lingering uncertainties are setting the conditions for bubbles to emerge as officials maintain their accommodative monetary stance. In an economy flushed with liquidity, prices of assets can increase even if growth fundamentals appear unsupportive.

There are already signs that the leverage in Asia is building up, while that of the West is falling. Since the collapse of Lehman Brothers, the Asian leverage has risen from 15x to 17x for the second quarter of this year (2009). The Western leverage, on the other hand, has decreased from 34x to 28x in the same period.

Asia’s leverage is coming off all-time lows and will probably go higher. This is especially so for Hong Kong, China, India and Indonesia.

iii. Joblessness ...

Meanwhile, the labour market conditions in the global economy have not improved much. Unemployment rates in most countries remain high, and they are rising.

This problem does not only plague the industrialised nations, but also some Asian economies, including China.

The unemployment rate in Malaysia was at a manageable 4% for the first quarter of 2009. The rate is expected to increase to 4.5% for the full year, compared with 3.3% in 2008.

The unemployment situation in Malaysia is mainly affecting the manufacturing sector, which is currently awash with excess capacity due to weak external demand.

iv. Declining Investments ...

Excess capacities across industries in most economies have caused the decline in private investments across the board.

In Malaysia, the sharp decline in private investments activities is due mainly to excess capacity in the manufacturing sector. Industry observers say that there could be a prolonged recovery for private investments in Malaysia due to the prevailing excess capacity.

vi. Widening Deficits ...

While the massive injection of government spending worldwide have managed to pick up the slack in most economies, higher government spending amid declining revenues have pushed some of them to face historically high levels of fiscal deficits.

This is particularly so for the US, whose fiscal deficit is expected to rise above US$2 trillion by the end of the year (2009).

Malaysia has been in a fiscal deficit position since the Asian financial crisis in 1998. The present (Sept 2009) pump-priming activities is expected to widen its fiscal deficit to 7.6% of the country’s GDP this year (2009), compared with 4.8% in 2008 and 3.2% in 2007.

Some countries like Singapore are luckier as they are merely depleting the surpluses that they have accumulated through the boom years to finance their expenditure.

vii. Protectionist Measures ...

On the global trade front, many countries seem to be putting up barriers to protect their own turf. This is despite policymakers preaching the opposite – that protectionism will only hurt global recovery. A case in point is the recent spat between China and the United States.

The Ugly

Greed Is Back …

With the improving economic outlook, the appetite for risk has also returned as investors seek to make more easy money.

Stock markets in major economies are rising. It is widely feared that their valuations are getting stretched to levels unjustified by earnings growth. It has also been reported that Western financial institutions are once again betting on high-risk instruments for better margins.

Unfortunately, as long as there is money to be made, greed is pretty much a virtue. Yet, this is the very sin that has brought the global economy into this mess. Generally the fear of missing out on the global rally far outweighs the risk of a potential sharp correction ahead.

f. Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity

The Government is putting its money where its mouth is. Recent developments seem to suggest that it is finally ready to reduce its shareholding in the government-linked companies (GLCs), something that has been talked about for a long time.

A strong indication surfaced on Sept 10 2009, when Khazanah Nasional Bhd placed out a 5% stake, or 55 million shares, in Malaysia Airports Holdings Bhd.

At the same time, two other Khazanah-related companies, namely CIMB Group Holdings Bhd (in which Khazanah owns 28.4%), and Pos Malaysia Bhd (32.2%), reported large off-market share placements.

On Sept 10 2009 as well, 30 million CIMB shares, or a 0.8% stake, changed hands at RM10.38 per share. It was reported that the seller is Takrif Aspirasi Sdn Bhd. CIMB’s eight largest shareholder. The following day, Utilico Emerging Markets Ltd sold 25 million Pos Malaysia shares, or a 4.7% stake.

While these two off-market transactions are unrelated to Khazanah, they support the argument that now (Sept 2009) may be a good time for the government investment arm to sell shares in the GLCs.

Rumours began swirling as to which investee company of Khazanah will be next to see a similar share sale.

That aside, market watchers believe that Prime Minister Datuk Seri Najib Razak, who is also Finance Minister, is serious about wanting the Government to lower its corporate holdings and attract new investors.

He is thoughtful in allowing the private sector to discover its own path and for the local bourse to eventually flow with liquidity.

Government’s desire to pare down its stake in GLCs will get more participation, and in an overall sense, there’s greater market liberalisation. This also profiles Malaysia as an institutional haven for global investors.

The stock market needs more shareholder diversity, and this means fewer shares in the hands of the usual local institutional funds.

Long-term shareholders such as sovereign wealth funds that have a strategic interest will be value adding for the GLCs in many different aspects. A sovereign fund won’t sell for the sake of trading gains. In fact, they may increase their stake over time, as they always need to be invested.

It is true that for a country to have long-term stability, it still needs its own capital base and local investors. However, foreign investors create competition, which is needed to put everyone on the treadmill. Otherwise, there is a tendency to lie down or stand still.

With foreign participation, Malaysia will have the benefit of exposure to foreign views and perspectives. This is because, apart from the capital infusion, what is just as important is the value brought by the new investors.

A foreign investors can contribute by enhancing many different aspects such as market access, higher technology and new management. This leads to higher productivity and competitiveness. These are key ingredients to fast track our economy to global heights.

The private sector has to play its part in reinvigorating the economy and creating some crowding-in effect.

While people may be concerned about foreign control, this should not be an issue, especially when the positive effects on the industries and companies become tangible.

For instance, should Volkswagen AG (which is a world leader in its segment), takes up a stake in national car maker Proton Holdings Bhd, it immediately creates greater global value. Upon signing on the dotted line with its new partner, Proton becomes a global player instantly!

While hot money is sometimes viewed negatively, it has its benefits. First of all, it increases optimism and confidence levels. Hot money is inevitable in any market, although, yes, too much of it isn’t good. But in Malaysia’s case, we are at the stage where we need more foreign direct investments (FDI).

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Khazanah Nasional Bhd is expected to reduce stakes in more government-linked companies (GLCs) after selling off 55 million shares, or 5%, in Malaysia Airports Holdings Bhd (MAHB) to unidentified institutional investors.

The government-linked investment arm might be looking to divest stakes in companies that it owned more than 60%. The selldown in MAHB’s was “unique” as Khazanah used to own more than 70% in the company.

The next possibilities would be those in which it has over 50% stakes, which only consist of a few companies. Time dotCom Bhd and Proton Holdings Bhd could be next as “Khazanah has always talked about divesting its interest in these companies.”

Khazanah doesn’t need the funds. It’s in line with the Government’s call to free up more liquidity to attract foreign investors. The sale proceeds, nonetheless, could be pumped into Iskandar Malaysia.

The reduction in shareholding should not have an impact on the transformation programme that the GLCs were undergoing since Khazanah still owned substantial stakes. As long as Khazanah maintains its position as one of the key shareholders, it should not be an issue. Khazanah could still retain control as long as it had board representation in the companies.

The 5% selldown in MAHB is (of) no impact. What is 5% when its stake was over 70%?. With the sales proceeds, Khazanah could boost its exposure in the services and high technology sectors. Also expecting Khazanah to tap offshore opportunities especially since asset classes in the US and Europe remain at low levels.

Meanwhile, Takrif Aspirasi Sdn Bhd, CIMB Group Holdings Bhd’s eighth biggest shareholder, sold 30 million of the bank’s shares, representing 0.8%, at RM10.38 each, valuing the block at RM311.4mil. The report did not identify the buyer of the shares.

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A total of 55 million MAHB shares were traded in three off-market transactions at RM3.30 per share for a total of RM181.5 million. The transactions, involving a combined 5% stake of MAHB, have given rise to speculation that it could be the government’s investment arm Khazanah Nasional Bhd paring down its stake in the airport operator.

Khazanah has a 72.74% stake in MAHB, which has a free float of about 27.26% representing 299.85 million shares in the company.

Sources said buyers in those off-market deals were most likely local and foreign institutional funds.

Talk has it that CIMB Investment Bank Bhd has been mandated to help Khazanah sell down its stake in line with Prime Minister Datuk Seri Najib Razak’s call to government-linked companies (GLCs) to increase their stock liquidity.

Interestingly, CIMB group chief executive officer Datuk Seri Nazir Razak was quoted as saying that the entry of foreign sovereign wealth funds, particularly from China, would be good for the country as it would create greater connectivity with the fastest-growing economy in the world.

Second Finance Minister Datuk Ahmad Husni Hanadzlah later denied the report.

If Khazanah was the seller in MAHB, then more selldowns could be expected in the coming weeks (2009 & Beyond), including those in other GLCs, as the environment now (Sept 2009) is conducive given the improved investor sentiment.

It has often been argued that GLCs, which make up some of the largest capitalised companies on the local bourse, have not been able to adequately garner foreign investor interest due to the illiquidity of their shares, the bulk of which is held by government institutions.

It is believed that GLCs’ share prices could improve in line with any enhancement in liquidity.

The government’s move to pare down its stakes, if confirmed, would be positive for the local market and help to increase the attractiveness of such counters in the eyes of investors.

There were keen interests all along in most of these GLCs. Many more such moves might follow suit, and MAHB could be the first among the pack.

g. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model

Looking back at the first quarter of 2009, many investors, fretting about the woeful state of the global economy, failed to focus on the things that matter - valuation and the rapid acceleration of global policy momentum. As it turned out, the combination of these factors created the backdrop for the sharp rally in global equities over the past six months (March – Aug 2009).

Looking forward now (Sept 2009) from the heights that global equity prices have achieved, it is understandable that investors are getting increasingly wary. Admittedly, the valuation case has weakened with the rallies to date (Sept 2009). But global policy effectiveness has not waned. Rather, it has begun to shift from the Chinese-led successes of the first half of 2009 to a broader, global story, with US policy achievements, in particular, emerging recently.

This leaves the prospect for another leg in the global rally in equities that began in March 2009.

Continued momentum in US economic and earnings data in coming weeks (Sept 2009 & Beyond), underpinned by US policy momentum of the second quarter 2009, is expected to drive this leg of the rally. Year-to-date (Sept 2009), economic recovery momentum has been key to identifying relative outperformers globally. With emerging markets recovering from the 'Great Recession' more quickly than developed markets, economic momentum reflected in data releases has been a focus of market attention in the current rally (Sept 2009). Recall, early in the year (2009), news of the US and Chinese economic policy changes that helped set the stage for a bottoming in global markets. With Chinese stimulus coming sooner and more aggressively, unsurprisingly, the MSCI China rose 35 per cent in the first half of 2009, compared with a meagre 5 per cent for MSCI World.

With Chinese policy now (Sept 2009) stabilising, as Beijing tries to contain rapid year-to-date (Sept 2009) loan growth, US growth momentum is beginning to benefit from Washington's stimulus efforts of the late-first quarter of 2009. Their effectiveness was most recently seen in the July 2009 expansion of the Institute of Supply Management's New Orders Index, which historically has provided a three to six-month lead to turns in the US economy. Indeed, the most recent reading suggests that investors' concerns about job growth in the United States may begin to be addressed in coming months (Sept 2009 & Beyond)), providing further economic support to the earnings drivers that may emerge come October 2008.

Looking a bit further ahead, the US third-quarter 2009 earnings season likewise looks set to provide support to the market in coming weeks (Sept 2009 & Beyond). Indeed, during the rally since March 2009, the US earnings season - the first six weeks of each quarter - was a key driver for market performance. Recall, as the first-quarter 2009 earnings season got under way in April 2009, world equities, represented by MSCI World, rallied 18 per cent before stalling in mid-May 2009 as the earnings season came to a close. Similarly, as the second-quarter 2009 earnings season got under way in July 2009, world equities rallied another 12 per cent up to mid-August 2009, as the season came to a close again. In total, on a compounded basis, the earnings-season rallies accounted for almost two-thirds of the 52 per cent rise in global equities up to Aug 21 2009.

With another earnings season quickly coming upon us in October 2009, upward revisions to earnings expectations could continue into the northern autumn 2009, potentially providing a catalyst for the next leg of the rally we have seen since March 2009.

The resumption of US economic growth momentum and positive prospects for US earnings surprises in the third quarter 2009 suggest the global economic recovery is starting to transition from one with China as the sole driver to a more balanced US-China model. Indeed, since mid-year 2009, this transition in policy and data has resulted in US equities outperforming their Chinese counterparts, with MSCI US rising 11.5 per cent up to Aug 21 2009, exceeding the 5.7 per cent increase in MSCI China over the same period.

Therefore given that valuations are no longer cheap, expected news flow leads us to believe that caution will not be rewarded by the markets in the coming months (Sept 2009 & Beyond). Rather, investors are encourage to manage their risk by managing their exposure within global equities. Expecting that Asian equities, even after a near-50 per cent rally year-to-date (Sept 2009), as indicated by MSCI Asia ex-Japan, may participate in this next leg. However, unlike the first half of 2009, where they trumped the flattish 5 per cent performance of global equities, do not believe that they will necessarily lead regional performances as they did in the first semester 2009.

Rather, investors who ignored US equities early in the year (2009) may wish to reconsider opportunities provided by this market. However, they should keep in mind that while recovery looks entrenched, the US recovery is expected to come in sub-trend, with GDP growth in the recovery phase falling short of previous cycle peaks. With this in mind, investors may seek to focus on opportunities that continue to under-price even the modest economic recovery expecting.

Despite our optimism through to year-end (2009), we must admit that the global recovery story must be strengthened further to sustain the rally into the new year (2010). China, already grappling with rapid loan growth, must moderate its aggressive easing policy of early-2009 and structurally, continue to build its domestic consumer base. As for the US, it needs to transition its economy from a stimulus-led recovery back to a private sector-driven demand story.

On balance, though, while there are certainly concerns on the horizon, news flow over the coming months (Sept 2009 & Beyond) is expected to show not only recovery but, in the case of the US, accelerating recovery that investors have been hoping for, leaving the balance of risk and reward through year-end (2009) still pointed in favour of the reward camp, and creating an opportunity for investors to broaden out their focus from first-half leader (1H2009) emerging markets to include opportunities presented by US markets (2H2009) as well.

State Of Global Economy …

As the global economy returns to the path of a synchronised recovery, thanks to the synchronised massive spending of governments worldwide, manufacturers around the world are also gaining confidence to ramp up production and inventories.

The global Purchasing Managers Index (PMI) has now (Sept 2009) entered the positive territory for the first time since May 2008. The index at 53.1 last month (Aug 2009), rising from 50 in July 2009, provides an early indication that the global manufacturing sector is experiencing recovery in the demand for their products. Such trend will certainly add strength to the economic recovery process.

In the United States, for instance, the PMI for the manufacturing sector, as measured by the Institute for Supply Management, recorded the first expansion in August 2009 with a reading of 52.9, after 19 months of contraction. Any reading above 50 for the index signals an expansion.

As for the European manufacturing sector, the easing contraction has added evidence that the region is emerging from recession. The recent survey of purchasing managers produced an index reading of 48.2 for the euro-area manufacturing sector in August, compared with 46.3 in July 2009. Although any reading below indicates contraction, the rise in the European PMI last month (Aug 2009) was the highest in 14 months.

China is still charging ahead, with its manufacturing sector staying above the 50-mark for the sixth consecutive month. China’s PMI rose at the fastest pace in 16 months in August 2009, with a reading of 54 compared with 53.3 in July.

Similarly, Singapore’s PMI also stayed above the 50-mark for the sixth consecutive month in August 2009, with a reading of 54.4 compared with 51.5 in the previous month.

For most of the economies in Asia, what’s critical in boosting their manufacturing sector is demand from major advanced economies such as the United States and Europe.

This is indicated by the recovery in the import order from the advanced economies from minus 5.6% quarter-on-quarter (q-o-q) in the three months to March 2009 to a growth of 2.9% q-o-q in the April-June 2009 period.

Specifically, the recovery in the imports of the United States from a decline of 6.7% q-o-q in the first quarter 2009 to a growth of 3.5% q-o-q in the second quarter helped lift the exports and industrial production of Asia.

In Singapore, for instance, the industrial production in July 2009 rose 12.4% year-on-year (y-o-y), compared with a slump of 9% y-o-y in the preceding month.

State Of The US Economy …

The Budding Recovery Has Staying Power: Recent business austerity is boosting profits and the need to expand, and rising global growth is lifting exports, all while massive policy efforts continue to

The worst U.S. recession since the 1930s appears to be over. The best sign: Real gross domestic product, the most comprehensive gauge of the economy's ups and downs, almost certainly hit bottom in the second quarter 2009. Monthly data so far suggest a surprisingly strong advance this quarter (3Q2009) with enough momentum to keep the upturn going in the fourth quarter 2009. Still, many investors are skeptical. The improving outlook has succeeded only in setting off a hot debate:

Is the recovery sustainable, or just a temporary bounce fueled by a few one-shot government programs?

The debate will not be settled anytime soon, but several underlying forces make a strong case that the upturn is durable. Already, spending by consumers and businesses, homebuilding, and manufacturing activity have begun the third quarter 2009 with much more oomph than expected, and many economists think annualized GDP growth in the 3%-4% range this quarter (3Q2009) is a real possibility.

The key force at work is the sheer volume of fiscal and monetary policy. Its support of demand this year (2009) and next dwarfs any such effort in the downturns since World War II. To date (Sept 2009), most of the fiscal stimulus has been tax-related, along with other income support. However, much of the stimulus from infrastructure spending and other government outlays is only now (Sept 2009) working its way into the economy. For example, since January 2009 the growth of public construction spending through July 2009 has accelerated to an 18.9% annual rate.

Plus, the Federal Reserve's support of the credit markets will continue to strengthen financial conditions, so crucial to growth, well into 2010. Housing will benefit greatly. Already, the housing component of GDP is set to add to growth this quarter (3Q2009) for the first time in 3 1/2 years.

Plus, with home prices bottoming out, prospects for mortgage-backed securities will improve, helping to further shore up housing while stanching the bleeding on bank balance sheets.

Prospects for business spending are also looking brighter, especially given the surprisingly strong performance of profits, which drive the expansion of outlays and hiring. In the second quarter 2009, profits of nonfinancial corporations, based on the Commerce Dept.'s accounting, rose at a 19.3% annual rate from the first quarter 2009—an especially solid performance for a quarter with falling GDP.

Profit margins also grew last quarter (2Q2009), a testament to the benefits of corporate cost-cutting and productivity gains. Nonfinancial companies are emerging from this recession with margins much higher than at the end of the last recession. With revenues set to pick up in the second half 2009, further gains in profits are a sure bet.

Of course, consumers will be essential to a lasting recovery, and their help will require stronger labor markets. The plus here is that businesses have been extremely conservative in their spending and hiring, which puts them in a good position to gear up quickly as a recovery takes hold. Many are doing so, as the recent easing in job losses suggests. In fact, income growth, the key to any sustained increase in consumer spending, is already getting support from wages and salaries, which rose slightly in July 2009 for the first month in almost a year.

Finally, the upturn is global, with Asia, the Americas, and Europe all set to grow simultaneously. A synchronized recovery will boost the volume of world trade, especially to the benefit of U.S. exporters. Trade typically has been a drag on U.S. growth early in a recovery, as demand picks up in advance of other economies, boosting imports and widening the trade deficit. This time the trade gap is not likely to widen as rapidly, eliminating a potentially large hindrance to growth.

In the past, steep recessions have been followed by robust recoveries as was the case in the 1970s and 1980s.

The current (March – Aug 2009) upturn seems to be starting out that way as businesses restock their exceptionally low inventories. But even if it doesn't maintain its initial burst, the strengthening supports under demand in all major sectors suggest this recovery has legs.

Refer To The Malaysia Equities Outlook 2.1

Stock Market Leading Performance Indicator

7 (0-3-Bearish 4-6-Neutral 7-10-Bullish).

CK Kok
Remisier
Futures Brokers' Rep
Kenanga Investment Bank
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