13th General Election and the Property Market

General Election is coming. One of the hotly debated topic would be the escalating house prices and the needs to provide more affordable houses to Rakyat. In line with that, iProperty.com has done a survey on "The 13th General Elections and the property market" with 2275 Malaysians respondents. What did they said?

Created by Iproperty MY, the number one website in Malaysia. Whether you have a house for sale or are looking to buy.

3 Possible Election Outcome & Share Market Reaction

* Note: This is NOT a political post. Instead, we're talking about share market movement based on possible election outcome. Abusive comments are strictly prohibited and will be remove automatically.

Local investors have been staying sideline for months ago. Do you started to feel itchy now? Honestly, this is the feeling of mine as an investor, from being active to passive lately. I can't wait to start investing again in share market. However, we shouldn't simply jump in next Monday, right? Let's see the 3 possible election outcome and how market may react accordingly...

OUTCOME #1: BN retained power

Judging by the strong influx of foreign funds flooding local share market prior to election, this is definitely their expected outcome. If materialize, Monday market generally will rally. However, I expect this kind of rally will be short-lived, and turning downward after that. Why? Simply ask yourself these questions: When is the better time to take profit if not that time?

OUTCOME #2: Opposition Alliances won

Many people predicted that market will react negatively to this kind of election outcome. It's not strange. Anyway, once all the worries have settled down, new cabinet was formed, share market will recover. So, an U-shaped rebound is my bet.

OUTCOME #3: Almost 50/50 for Both

This is the worst outcome for share market. A hung parliament does not bode well for the nation. In this situation, very likely, elected assemblyman may jump-ship to another coalition vice versa. So, share market very likely will through months of instability. Dead share market was expected.

Even said so, Bursa Malaysia will definitely still be operating, not as published in one of the advertisement by political party. Hahaha. It's funny to see that kind of advertisement.

5 Things to Know before 13th General Election

Are you bored of the recent elections hoo-haa ? It's all coming from either party from different side, some NGOs, and some political related persons. How about foreigners? What are they thinking about our Malaysia General Election? Here you go...

In this note, Morgan Stanley outline the 5 things they think investors need to know regarding Malaysia elections:

1. What's upcoming? Setting the context
   The 13th General Elections are due to be held very soon in Malayia. Parliament needs to be dissolved no later than April 2013, and elections need to be held no later than 60 days from date of its dissolution.
   
   
2. Which are the key states to monitor?
   They are Kedah, Penang, Selangor, Perak, Johor, Sabah and Sarawak.
3. Election scenarios and macro implications
   BN Parliamentary seat share of > 63% would be seen as a positive surprise for investors. BN Parliamentary seat share of < mid 50% would be seen as a negative risk event by investors and could have implications for leadership and government stability. The political landscape will determine momentum of reform agenda.
4. Policy comparison: Pakatan Rakyat (PR) vs Barisan Nasional (BN)
   The broad economic thrust of PR policy is fairly similar to that of BN. However, PR campaign proposals have a more leftist slant and also focus on policy devolvement to state governments, more geographically balanced economic development, and strengthening of decentralization in Sabah and Sarawak.
5. What to expect in UMNO Party elections?
   UMNO elections have to be held by Jun-2013. The president of UNMO is historically the prime minister, and hence, this will determine whether there is leadership stability. Forthcoming elections will take place amid constitutional amendments which makes the process more democratic.

* NO abusive comments were allowed. Thanks.

Source: Morgan Stanley research report dated 18th Feb 2013

CLSA Malaysia Politics Market Strategy

There is no better time to blog about this post. After the plunge of KLCI yesterday, citing election risk, we came across an interesting research report by CLSA. As such, we would like to take this opportunity to share with you.

By CLSA,

An unexpected opposition Pakatan Rakyat (PR) coalition victory in the impending 13th General Election (13GE) would spark a broad sell-off in Ringgit assets. Changes of government are not uncommon in ASEAN. Looking at the experience of Indonesia, Thailand and the Philippines over the last decade, parliamentary control has seen significant shifts and governance has been possible despite the lack of a parliamentary majority. However, Malaysia has never experienced a change in government, meaning any change will come as a shock and with a host of uncertainties.

From an equity and debt market perspective, Malaysia has always enjoyed a political premium for the stability in governance and policy-setting stemming from majority control of parliament. The immediate financial market repercussions can be grouped as follows:

• Equity and bond markets sell-offs are likely as Malaysia's political stability premium is erased, at least temporarily. Domestic corporate, many of which have deep links with the existing government, will be putting big-ticket decisions on hold pending guidance on continuity;
• Ringgit depreciation can be expected in parallel with the sell-off in Malaysian assets by foreign investors. This will pose another drag on broad corporate and foreign investor confidence, especially foreign debt (though positive impact on exporters should not be forgotten).
• And, subsequently draw unfavorable attention from international rating agencies.

Near-term policy expectations

• PR's stated policies are broadly aimed at raising disposable incomes, improving fiscal governance (key revenue generator), and encouraging private investment.
• Higher minimum wage and lower car prices will support consumer spending, while cutting ASEAN-topping corporate tax rate would reassure corporate and investors.
• State oil company Petronas will get more resources to invest in rebuilding reserves.

Medium-long term policy focus

• PR's desire to "rebalance" government contracts and agreements means negative overhangs for state-dependent entities i.e. utilities, concessionaires, construction.
• Banks as large holders of private sector bonds will face negative risk perception.
• Reversing GLC dominance (Iskandar not impacted) will boost private investment and FDI; Khazanah could accelerate local asset disposals, lifting Bursa's free-float.

"Rain or Shine" stock picks

• At the macro level, companies with government-dependent contracts, licenses and concessions will see sustained negative overhang and discounting, while consumer and oil & gas sectors will benefit from rising disposable income and Petronas capex.
• Our "rain or shine" stock picks are expected to do well under either a BN or PR-led government, with earnings underpinned by higher disposable incomes, Petronas association, overseas earnings contribution buffer and a weaker currency.
• A market sell-off would be a prime opportunity to add to positions in Axiata, PGas, UEM Land, IHH, Sapura Kencana, AirAsia and exporters e.g. rubber glove players.

Source: CLSA Asia-Pacific

TA 2013 Malaysia Outlook: Ride the Volatility

By TA Securities,

We believe 1H13 will be a choppy period and election concerns could drag down the FBM KLCI by 8% to 10% in the period before market rebounds in the 2H13. The impetus for revival will mainly hinge on the end of election overhang and strong domestic demand.

Sustained monetary easing on the back of low inflationary pressure and attempts to reduce budget deficits by cutting subsidies and channeling the savings to productive ventures are positive despite the short-term impact on earnings. Overall, domestic economy will play an integral role in sustaining confidence in domestic equities next year in the absence of any overwhelming micro drivers.

Corporate earnings for 9M12 were less robust and we forecast full year earnings growth for the FBM KLCI to be 9.4% only. Chances of a strong revival in the immediate-term are minimal based on external sentiment and dwindling demand in key export markets. Our earnings growth forecast of 8% and 8.4% for CY13 and CY14 is not compelling vis-a-vis key regional emerging market's 16.1% and 14.7% respectively. It could come under further pressure if the implementation of minimum wages had greater impact in raising the input cost than the intended increase in disposable income and spending. High likelihood of subsidy cuts (electricity tariff and fuel price increases) post 13th General Election would be negative on earnings and will prompt us to trim our CY13 and CY14 forecasts by 1.2% and 4.9% respectively.

How about Foreign Markets?

External factors will continue to dictate the market directions. The structural flaws cannot be undone overnight but expect bouts of positive improvements to kick in the 2H13 as fats are trimmed and jobs created. China could revive its domestic growth without stoking inflationary pressure but it can be destabilizing factor if its row with Japan escalates. The same applies to Iran and the West.

Can KLCI end Strong this year?

We derived our end-2013 target of 1,710 for FBM KLCI after applying 2008-2011 average forward PER of 14.3x on mid-cycle EPF of 120 sen. The underlying key assumption is that BN will return to power with slim majority. This target is a 5% discount to our bottom-up valuation of 1,800.

FBM KLCI performance before and after 2008 Malaysia's election

Strategy...

Sell-on-strength, especially overvalued defensive plays in the Consumer, Healthcare and Telco sectors and turn cash-heavy to accumulate high beta plays in domestic sectors, which are mainly related to Construction, Oil & Gas and Property sectors, in 1H13. Banking sector holds good buys based on their attractive valuation, still robust loan growth and bright chances of benefiting from ongoing domestic expansions.

Source: TA securities report

What's Wrong for an Economist to Predict the Upcoming Election?

I am writing this post during midnight after I came across a report saying that Bank Islam chief economist suspended after predicting that opposition will win the upcoming election. As usual, Finance Malaysia would NOT include political elements in its blog post. And, we would like to stress here again, that we are discussing this topic WITHOUT any political elements. Then, what are we talking here?

FREEDOM of VOICE & OPINION

I knew that I could not sleep if I didn't speak up for En. Azrul Anwar. We are not here to defend anyone, neither to offend any parties. But, we should open up our mind, and accept other opinions with open heart. In this matter, the said bank is losing its credibility and reputation by suspending one of its key staff --- just because of his prediction. Why can't he speak freely? Will the bank lose its banking license because of this?

Does he answer the question wrongly? NO... It's a prediction only, there is no right or wrong here.

Everyone knew that political changes is the key risk for Malaysian economy this year. Can an economist avoid this topic? Or, should they answer the same question with the same biased answer? Otherwise, who will listen to their opinions? Then, why a company hires an economist to represent them in the first place?

Funny... That's why Finance Malaysia blog is another channel for investors and readers to get 3rd party opinions and views. Blogging industry will prosper even faster, because the demand is there. Readers DO NOT want to read biased newspaper or news portal anymore. Thanks for your support. Finance Malaysia supports Azrul Anwar.

Budget 2013: Election or Rakyat centric?

General election is around the corner. External environment was not so promising, following the no ending of European debt crisis, world economic slowdown, and recent tension between China and Japan. I believe all of these would be some key factors being taking into consideration to formulate the Malaysia Budget 2013.

Goodies? Bonus? Cash handout?

Themed as "Prospering The Nation, Enhancing Well-Being of the Rakyat: A Promise Fulfilled". Our prime minister, who is also Finance Minister, tabled the 2013 Budget at Dewan Rakyat yesterday. Over here, Finance Malaysia blog would only touches on some key points:

• Economic growth projected to expand between 4.5% - 5.5%
• Federal Government's revenue in 2013 is estimated to increase to RM208.6 billion
• Continuation of BR1M of RM500 to households earning not more than RM3,000 a month and also extended the aid to cover a payment of RM250 for single unmarried individuals aged 21 and above, earnings not more than RM2,000 a month
• RM 16 million a year group insurance scheme for registered hawkers and small businesses for coverage of up to RM5,000
• FM: Once again goodies were dished out to created a feel-good factor for govt and we doubted whether Msia could achieves the 4% budget deficit target in 2013. Anyway, govt could still succeed by increasing the revenue by using these goodies. How? Very simple, that's to entice the non-registered self-employed and businesses to registered so that they are accountable for their earnings.

Spurring retail bond/sukuk market:

• DanaInfra Nasional Bhd to issue retail bonds worth RM300million by end-2012 to finance MRT development projects
• Additional expenses incurred in issuance of retail bonds and retail sukuk to be given double deduction for a period of 4 years from YA2012 to YA2015
• Individuals investors given stamp duty exemption on instruments relating to transactions of retail bonds and retail sukuk
• FM: It's very clear and straight forward that the govt want to see the soon-to-be launched retail bond/sukuk market to prosper, thus, attracting more foreign funds to the country to make it more vibrant and liquid.

Youth-centric offers:

• A one-off rebate of RM200 for the purchase of one unit of 3G smartphone from authorized dealers for youths aged between 21 to 30 years old with monthly income of RM3,000 and below.
• PTPTN loans: 20% discount for full repayment of loan; 10% discount for regular repayment.
• RM250 1Malaysia book voucher for students studying at institutions of higher learning
• FM: It seems too good to be true for PTPTN borrowers. But, it was attractive for probably 1% of them only. Why? We must remember that they borrow because they doesn't have money in the first place, not because they want to leverage. Do you get my meaning? Or, does govt scared if opposition coalition will void all outstanding loans if they took over?

Addressing the skyrocketing property prices:

• RM500 million by PR1MA to build 80,000 houses in major locations nationwide with selling price ranging between RM100,000 and RM400,000 per unit. Among the locations are KL, Shah Alam, JB, Seremban and Kuantan.
• MyFirst Home Scheme will be enhanced by increasing the income limit for individual loans from RM3,000 to RM5,000 per month or joint loans of husband and wife of up to RM10,000 per month.
• Real Property Gains Tax (RPGT) for properties disposed within 2 years will be taxed at 15% (up from 10%) and 10% for between 3rd to 5th year (up from 5%), whereas other term remained unchanged.
• FM: For us, we think that 15% RPGT is still too low if compared to pre-2007, where RPGT for first 2 years disposal was as high as 30% and 25%. Meanwhile, MyFirst Home Scheme was very tough to get it, as far as we concerned. Once again, good luck to those potential property buyers.

Changes to personal income tax:

• Individual income tax rate to be reduced by 1% for each grouped annual income tax exceeding RM2,500 and RM50,000.
• Tax relief on children's higher education scheme (SPNN) increased to RM6,000 per person (from RM4,000 previously).
• FM: The 1% tax reduction seems more effective to help out those mid-income earners, although it's not much. However, we are disappointed once again for the unchanged REITs withholding tax structure which makes M-REITs less attractive compared to regional REITs.

Government servants is the BIG winner AGAIN!!!

• Minimum pension to be increased to RM820 for those who had served the govt for at least 25 years. More than 50,000 pensioners benefited.
• 1.5 months bonus for civil servants.
• FM: Well... Nothing much we can say about it. This is a govt budget. What's wrong if govt servants being the beneficiary? But, should it be again and again? Hmmm...

"Stocks-to-watch" for the coming Monday:

• Genting, GENM, JTI, BAT on the surprise unchanged sin taxes
• Construction companies on the River of Life projects, EPP projects and schools upgrade
• Consumer related players on the expected extra spending by govt servants with bonuses
• Low cost housing developers (etc. Hua Yang) for possible contracts by PR1MA
• Financial institutions with investment banking arm for the launching of retail bond/sukuk market

RHBRI: Market Outlook & Strategy 2H2012

In our view, the equity market will likely be stuck in a range-bound trading pattern for now, but will likely trend up as global economic uncertainties clear out towards the later part of the year. Investors’ key worries include :

1. worsening of the euro-debt crisis that remains unresolved
2. fears of China’s and India’s economies crashing down into a hard landing; and
3. the risk of US falling off the “fiscal cliff”.

External Volatility And Impending Election 2 Key Headwinds

On the home front, the major event to watch out for is the impending general election that could also create volatility to the local bourse given the uncertain election outcome. Nevertheless, we believe the market will eventually trend higher towards end-2012, premised on:

1. the ECB making a more decisive move to mutualise the debts of Eurozone governments;
2. China policymakers ease policies substantially and its economic growth re-accelerates;
3. US Congressional leaders cobble together some deals to mitigate the impact from the “fiscal cliff” and allay the fear of its economy falling off the cliff; and
4. domestically, the general election produces a result where the ruling coalition party remains in control of the government.

Meanwhile, global financial markets are still likely to be awash with liquidity as central banks in advance countries have pledged to maintain extremely loose monetary policy and could unveil more quantitative easing programmes to support economic growth should the situation warrant. 


On the home front, the economy is more resilient than feared and we expect real GDP growth to stage a modest rebound to 4.7% yoy in the 2H, from +4.4% estimated for the 1H. In the same vein, net EPS growth for the market is projected to recover to +10.8% in 2012 before moderating to +7.8% in 2013. Consequently, we are maintaining our end-2012 FBM KLCI target at 1,650 based on 14.6x 2013 earnings.

Given global macro headwinds and general eletion risks on the home front, we believe it pays for the more discerning investors to hold some defensive stocks that have strong cash flows to pay sustainable dividends in their portfolios. In addition, we believe investors would still need to accumulate fundamentally-robust stocks on weakness in order to outperform the market. Sector-wise, our key overweight are telecommunications, consumer and banking, although we also have an overweight stance on the utilities, gaming and semiconductor sectors.


Source: RHB Research Institute

Any Hidden Agenda Behind the Sales of POS and PROTON?

Lately, there was a slew of divestment by Khazanah Nasional Bhd (Investment arm of Malaysia Government). And, the most recent one was the divestment of Proton stakes to DRB-Hicom. But, the strange part was DRB-Hicom was the winning bidder for Khazanah's stake in POS Malaysia last year too.

Questions have been pouring in to Finance Malaysia regarding this issue, such as, are there any linkages between the two national deals? Other than DRB-Hicom, there was none other better suitors? As such, we would like to give our opinion on this matter. (Just for your reading pleasure)

You have the Questions, We have the Answers

First, both POS and Proton were considered as "sunset" companies in their respective industry. Both were not managed well and fallen from their glamorous days. Just as many investors written them off from investment radar, DRB-Hicom comes into the picture. Frankly speaking, the only asset both companies have was Government's backing.

While POS has the monopoly status in its services, Proton being the national car maker was trying to monopolize too by merging with Perodua. It's been a hot debate on whether Proton and Perodua should merge for better synergies. Anyway, we think that they should remain status quo to creates a healthy competition for consumers benefits.

Idea of the year: Combining POS and Proton via Stamp?

Where is the money comes from?

Another question was on the financial soundness of DRB-Hicom to acquires both companies. We as investors knows that DRB-Hicom does not have much cash in hand (even after excessive borrowing). The 32.21% stake at RM3.60 per share in POS costing RM622.79mil. Then, how about the Proton stake which amounted to over RM1bil? It's like a snake swallowing a cow, then a buffalo within few months!!! Can you imagine?

Any Hidden Agenda?

After all this, Finance Malaysia comes out with a guessing questions on the two deals between DRB-Hicom and Khazanah. Anything to do with the upcoming general election? (Seems like everything was linked to GE nowadays) Does the Government scared of losing the next general election and preparing to divest some of its assets first? Then, to whom they should divest to? Of course, their allies, right? DRB-Hicom?

But, what if they won again and POS and Proton was sold? No worry, because their good ally will always be able to sell it back to them (potentially with good investment gains too). Then, Khazanah can re-list again both POS and Proton proudly. Is this the case?

Well, we're guessing only. And, once again, this is for your reading pleasure only. Don't take it seriously. Happy Guessing.

Credit Suisse's 2012 Malaysia Outlook

After looking into all those research reports on 2012 market outlook by local securities or research houses, it's time for foreign research houses. In this series of 2012 outlook, we kick start with Credit Suisse's report, in which a section of it was written specifically on Malaysia. And, below is the excerpt from it.

Malaysia’s GDP growth to outperform its regional peers'?

Real GDP growth expanded 5.8% yoy in Q3, led by strong private consumption (7.4% yoy) and fixed investment (6.1% yoy), and a surge in government consumption (21.8% yoy). On a seasonally adjusted basis, we estimate that GDP expanded 4.6% qoq annualized in Q3, stronger than that of Korea, Thailand, Singapore, the  Philippines, Hong Kong, and Taiwan. Malaysia remains highly exposed to a sharp slowdown in the developed world, but, on a relative basis, we think its domestic demand will hold up better than that of the other small open economies in the region. We expect private consumption growth to remain robust, partly due to high palm oil prices. In addition, fiscal spending from the government should continue to help boost spending in the next few quarters. We think there is upside risk to our 2011 real GDP growth forecast of 4.6%. Our 2012 GDP growth forecast remains unchanged at 4.8%.

Fiscal boost ahead of the next general election?

With revenues coming in much higher than budgeted this year as well as the backloading of the planned expenditure, the government has room to boost spending in the next few quarters. The

government spent RM154bn in the first three quarters of the year. Its revised 2011 budget suggests that it plans to spend another RM76.8bn (9% of GDP) in Q4, which is 20% yoy more than it spent in Q4 last year. Moreover, in its 2012 budget, the government announced one-off cash transfers to the poor, bonus payments and pay rises for civil servants, as well as various tax exemptions. Most of these are scheduled to happen in early 2012, which should provide a boost to sentiment and private consumption. The ‘people friendly’ budget suggests that the general election, which needs to be held by March 2013, might be near. We expect the government to continue to pump prime the economy before the next general election.

The result of the general election will determine the prospects for structural reforms. The government announced in the budget speech that it will liberalize another 17 services sub-sectors in 2012, including medical, architectural, engineering, accounting, legal, education and telecommunications services. However, there has been no news on subsidy reform or the goods and services tax. We think Malaysia has made some progress in its reforms, as reflected in improved rankings in the global competitiveness index (calculated by the World Economic Forum) and ease of doing business survey (published by the World Bank). However, the less popular reforms have been postponed and appear unlikely to happen before the general election. Its ranking on Transparency International’s Corruption Perceptions Index has also slipped in recent years. Our base case scenario is that Prime Minister Najib will win the general election, but fall short of regaining the two-thirds majority lost in the last general election. The quality of the win will determine whether Najib will stay as prime minister and gain

enough support to push through further changes, in our view.

Monetary policy to stay defensive

With risks surrounding the euro zone remaining high and inflation likely to fall below 3% yoy in Q1 2012, we think BNM will remain data dependent and be ready to cut the policy rate if needed. Our forecast suggests BNM will keep the policy rate on hold until end-2012. However, if the global growth outlook deteriorates in the coming months, we think BNM has both the scope and willingness to cut the policy rate. Similarly, we think the ringgit will continue to trade in line with its regional peers in the near term. However, we think BNM might allow some ringgit out-performance if and when the euro zone situation stabilizes, given that Malaysia’s current account surplus remains strong, domestic demand resilient, and there are signs of pick-up in US economic activity. Domestically, the election result should also be an important determinant of capital flows. A poor outcome for the ruling party could lead to heightened political uncertainty and capital outflows.

Source: Credit Suisse

Annual Strategy 2012 by TA Securities

2011 had triggered a wave of unwanted chain effects, which would not languish but resonate further into 1H12. While Japan is recovering from the worst ever tsunami and nuclear disaster, and oil prices stabilized after the unrest in the Middle East, conditions in Europe are expected to worsen before stabilizing.

Global Economy – Risk Factors Extending into 2012

Positive news flows on drastic measures to restore confidence in Europe and maintain the credit ratings of core economies could boost market sentiment in early 1Q12 and push the index to test the all‐time high of 1,597. However, the reality check on the implication of European austerity measures and rising market risk premium due to the 13th General Election (GE) could push the index around 1,200 levels in 1H12 based on a minus two standard deviation from its last decade’s historical mean of 16.6x.

A revival should ensue in the following months due to oversold conditions and anticipation of a subsequent recovery in Eurozone economy by mid‐2013 as markets move ahead by about six months. Our end‐2012 target is 1,520 based on a mid‐cycle PER of 13x.

Malaysia – Not Insulated

In the first nine months of 2011, the Malaysian economy registered a modest growth of 5.1% YoY thanks to the robust domestic demand and strong exports. In some ways, despite the turbulent external environment, rebuilding and reconstruction activities in Japan had helped spur Malaysia’s exports advancement during 3Q11. Nevertheless, the external sector is expected to remain challenging in 4Q11 before embracing a slowdown in 2012 amid the budget deficit cuts in the European Union, the slow economic rebound in the US and the anticipated softening of China’s economy. Hence, we expect Malaysia’s economic growth to narrow to 4.6% in 2012 following a 5.2% growth expectation for 2011.

On the fiscal front, the financial status of the Federal Government may continue to improve in tandem with the embodiment of fiscal prudence and boost in revenue. Overall consumer prices are expected to increase by 2.5% while monetary policy is expected to remain accommodative (OPR stable at 3.0%). A potential wild card is the reform agenda initiated by Prime Minister Najib Tun Razak. Factors that would accelerate reform include:

1. increasing political consciousness and demographic shift,
2. reenergizing investment in the local economy, and
3. strengthening fiscal credibility. Sectors that could benefit are Banking, Property and Power.

Political Risk?

We strongly believe the country’s 13th general election will be due in 1QFY12, especially before the parliament convenes in March. This could be a major dampener upon dissolution of the parliament as investors would exit and remain on the sideline until the outcome is known and the implications are digested. The ruling coalition is expected to retain its victory but its grip on parliamentary and state seats are expected to weaken. Thus, the effectiveness in implementation of policy reforms and domestic expansionary measures could be compromised and will be closely watched in 2012. With the backdrop of slowing external demand, spending on domestic infrastructure, construction and oil & gas sectors would be the key focus in 2012.

Investors should take profit on any rally over the next three months and wait to cherry pick. Traders should take short‐term positions to trade, mainly on blue chips, in anticipation of a year‐end and New Year rallies and exit by March. We expect higher downside risks in 1H12 as the flow of negative economic data, earnings downgrades and possible 13th general election hurt investor sentiment.

Top Picks for 2012

We reiterate defensive approach in stock selection in current uncertain period and bottom up approach in choosing value picks. Preferred buy picks are KIANJOO (TP: RM2.58), SEG (TP: RM2.51), SUNWAY (TP: RM3.16), BJTOTO (TP: RM4.92), BSTEAD (TP: RM6.21), KPJ (TP: RM5.04), GENM (TP: RM4.50), SAPCRES (TP: RM4.93), GAMUDA (TP: RM3.71) and SIME (TP: RM10.12).

Source: TA Securities

RHB 2012 Market Outlook & Strategy: Another Challenging Year Ahead

As we head into 2012, a lot of uncertainty remains. On the external front, the euro-debt crisis remains unresolved despite five major attempts to stabilise it. Meanwhile, the economic conditions in the Eurozone are deteriorating rapidly with major indicators pointing to the region entering a recession. A deeper-than-expected recession in the Eurozone would leave few countries unscathed.

In particular, the US economy, which is still in low gear, will likely be severely impacted, while China may also be in for a more severe downturn as effects of potential policy easing will take time to filter down to the real economy.

Slower Eonomic Growth Envisaged For 2012?

The Malaysian economy will not be spared and will likely experience slowing export growth, though this will be cushioned by resilient domestic demand given the progress in the implementation of the Economic Transformation Programme. We expect the country’s economic growth to slow down more significantly to 3.6% in 2012, from +5.0% estimated for 2011. This points to weaker earnings growth, projected to slow from 10.5% to 7.8% during the same period for the FBM KLCI benchmark (ex-Tenaga).

Domestic Demand Likely Be More Resilient

With slowing economic growth, general election and multiple headwinds from the external sector, we believe investors will be in for another challenging year ahead. Given a number of significant risks in the horizon, our end-2012 FBM KLCI target is set at a conservative level of 1,480, based on unchanged 13x 2013 EPS. We expect a volatile 1H with sentiment gradually improving in the 2H as clarity on the global economy improves and investors begin to look forward to an economic rebound in 2013.

Non-election plays?

For investors looking for stocks that are less sensitive to the outcome of the election, we recommend KLK (one of Malaysia’s largest and independent plantation companies, with effi cient yields that have set the benchmark for the sector), Public Bank (large and defensive bank with a conservative and highly-regarded management), Digi (foreign-owned, well-run and in the broadly stable telecom industry) and Parkson (holding company for Parkson Retail Group listed in Hong Kong and Parkson Retail Asia listed in Singapore, with exposure to resilient retail growth in China, Vietnam and Southeast Asia). In addition, Sarawak stocks like HSL, Jaya Tiasa and Ta Ann are likely to be relatively immune, as the state election was already held in April, with two-thirds majority given to the incumbent Barisan Nasional-linked chief minister.

Strategy

As global headwinds remain strong and situations could get worse, we continue to advocate a defensive investment strategy, focusing on high dividend yielding stocks with reasonably good growth potential. Nevertheless, after a period of volatility, a recovery will undoubtedly follow and as such, we believe it pays for investors to accumulate fundamentally-robust stocks on weakness for tactical plays. Sector-wise, our key overweight are telecommunications, gaming, plantation, oil & gas and consumer.

Source: RHB Research Institute

Budget 2012: How Does 1% more EPF Affecting YOU?

During the recent Budget 2012 announcement, one of the controversial issue is the increment of 1% contributed by employers to EPF effective 1st January 2012. This will bring the minimum contribution rate by employers to 13% from 12% currently for those earning less than RM5,000 per month.

The Fatter EPF

While employees are welcoming the new rules, many employers are voicing out their concern on the extra burden being bear by them. "This is not fair to us, especially during current scenario where businesses are bracing for more challenging times ahead", says one of the concerned boss. Although there is some sort of tax-relief for employers who contribute more, bosses are still unsatisfied by the new ruling which adds to their fixed costs.

What is the rationale behind?

The reason is somewhat very good, that is "to equip Malaysians more retirement funds for their golden age" after recent facts shown that Malaysian generally fully utilized their EPF monies between 3-10 years time after retired. This is an alarming issue which prompt government to impose the new ruling.

We work hand-in-hand

However, Finance Malaysia found another good reason behind all this. That is "EPF needs more money". Why?

1. General election is coming very soon
2. We need a feel good factor on Bursa Malaysia
3. External environment resulting in a not so perform KLCI

If we link all the three points together, we can come out a conclusion, which is "Due to the gloomy economic outlook caused by western countries, Bursa Malaysia is in red territories in-line with other countries. Normally, KLCI is also an index which measures the health of Malaysia's economy. In other words, people perceived that our economy is good if KLCI is advancing, which acts as an advantage for the government in the coming general election. And, one of the important supporters was EPF". So, you know why EPF needs more money now?

Then, how does 1% more EPF affecting you?

Less Increment. If raw materials prices eats into profit, bosses will pass the extra costs to end consumers. Does this 1% more EPF consider as extra cost to bosses? Definitely. But, this is called operating costs to employers. So, the natural option for employers is to giving you less increment, thus reducing the effect of 1% more EPF contributions.

Example, you may only get a 9% increment, instead of your deserved 10%. Anyway, you still get the money in this case, but is in your EPF account rather than cash in hand. Good luck, buddies.

Note: This is purely for your own consumption without the intention to provoke any parties.