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

Unbelievable 1Malaysia Amanah Rakyat Scheme?

Did you watch TV news just now? There is a good news for Malaysian who are looking for higher saving rate for their monies. Yes. I am talking about the fresh from oven 1Malaysia Amanah Rakyat scheme. The scheme was launched by Prime Minister, which aimed at helping those with a monthly household income of RM3,000 and below.

Unlike the previous series, the new scheme was a hybrid of a unit trust investment and loan product, capable of generating a consistent cash flow or monthly income. It will be made available from Jan 30. But, the best part is it comes with a Guaranteed return. Unbelievable?

The limit is RM5,000 and it can be bought through savings or investment loans from selected financial institutions, such as Maybank, CIMB, RHB and BSN. Investors would get a guaranteed RM134 monthly and for those who borrow, they only need to pay RM84 a month and still get RM50 in profit.

Too Good to be TRUE?

Let's us calculate the return on investment. If investors fork out RM5,000 themselves to invest, the return would be RM1,608 per annum (RM134 x 12 months) and was equivalent to 32%. You don't have to calculate again. It's 32%, some more guaranteed.

Well, how about by borrowing the RM5,000 investment capital? If you borrow to invest, based on the RM50 net profit per month, it works out to be RM600 profit per year or equivalent to 12% return. Still consider very good. Nope, it was infinite return though because basically you pay nothing up-front to make 12% return, right?

Comparing to Fixed Deposit rate of only 3.25% per annum currently, 32% is 10 times that figure. Example, if you put your money into the new scheme, it was equivalent to putting your money into 12months FD for 10 years!!!

How did PNB guarantee?

Frankly speaking, Finance Malaysia really do not know. We're cracking our head hard now, and yet still do not have any clue. I think only PNB and Government know. Maybe, this is just another way of dishing out money to the hand of Rakyat. The special part is Government giving out beautifully this time indirectly (but, it still very obvious for us).

Maybank 2012 Outlook & Issues: Tilt to Safety

2012 will be another volatile year, we expect, tracking closely headline news from abroad given unresolved macro conditions brought forth from 2011: high debts but low growth at the eurozone and US. Confidence continues to wane on a resolution to the debt crisis which is negative on sentiment and will destabilize growth.

We maintain our 2012 year-end KLCI target of 1,500 pts based on one standard deviation below mean on expectation of turbulence still at the external markets impacting sentiment and global growth. At the home front, it will be a year with potentially two major elections:

1. an early 13th general elections (13GE) and
2. UMNO party elections for the top posts in 4Q 2012, where the elected party president will helm the country’s premiership position

Air Pockets Ahead?

That eurozone’s debt crisis has stayed unresolved means that there is still default risk. We expect higher bouts of volatility in 1H 2012 where much of the PIIGS and US government bonds will mature. Other risks are potential deleveraging by the European banks which could lead to a credit crunch, which is recessionary in nature. The other risks are likely social uprising from tough austerity measures in the troubled economies and eventually, the fate of the euro itself.

Malaysia to out-perform, nonetheless. We expect Malaysian equities to out-perform again against a back-drop of external uncertainties and volatility. Cushioning the downside risk will be further traction on the ETP implementation, a resilient corporate earnings profile which is largely domestic focused, healthy corporate balance sheets, high domestic liquidity, stable foreign holdings, and strong participation of government linked investment funds in Malaysian equities.

Catalysts and news flow

• Macro blueprints will be fewer in 2012 after the New Economic Model (NEM), Government Transformation Programme (GTP), Economic Transformation Programme (ETP) and 10th Malaysia Plan (10MP) were unveiled in 2010, followed by the Strategic Reform Initiatives (SRI), 2nd Capital Sector Masterplan (2CSMP) and Financial Sector Blueprint (FSB) in 2011. 2012 will be a year of implementation for these blueprints, in our view.
• Nonetheless, the Malaysian market will not be dry of action with 3 major IPOs lined up in 1H: Gas Malaysia, Felda Global Ventures Holdings (FGVH) and Integrated Healthcare. Also, the possible re-listing of Astro’s domestic operations and Malakoff, the listing of AirAsia’s Indonesian and Thai associates and AirAsia X, and the REIT-ing of KLCC Property and Kris Assets’ assets.

• M&As will remain in flavour if market conditions stay, with the SapuraCrest-Kencana merger to complete in Mar 2012, creating a group of RM11b-RM12b in market value, either the 3rd or 4th largest in the oil & gas sector after Petronas Gas, Petronas Dagangan and Bumi Armada. We expect M&As to extend in the financial services (investment and Islamic banking) and oil & gas service providers.
• Government’s equity divestment will also continue, including on Khazanah’s holdings. In the news presently is Khazanah’s potential sale of its stake in Proton (it now has a 42.7% holding). Also, MAHB may see new equity issuance, thus, diluting Khazanah’s 54% stake. These measures will raise the liquidity of the Malaysian bourse.

Market strategy

We will continue to exercise caution expecting the dividend stocks with largely domestic focused earnings, to market outperform. Our top picks are Public Bank, Telekom, Berjaya Sports Toto and Axis REIT. We will add on selected ETP related thematics in oil & gas (top picks: SapCrest, Kencana) and construction (Gamuda, Hock Seng Lee), and the value stocks (Sarawak Oil Palms, TSH Resources, Hartalega) for medium-term gains. Sector wise, we are overweight on construction, gaming (number forecast operators), oil & gas and REITs.

Source: Maybank Kim Eng Research Report

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

Asinus asinum fricat

I have previosuly written about my worries for the ”Bermuda Triangle” of

private equity firms ------ CLOs ------ bankruptcies

See for instance “Hur mycket leveraged loan exponering finns det i det svenska finansiella systemet” from November 2008. In that article I stressed the problems private equity firms might face when people start to shun structured products such as CLOs, and the private equity firms, in turn, end up having trouble rolling over their loans. Or as I wrote, will we have the “1980s all over again”?

Well, now this scenario appears to have materialized itself! Many (leveraged) loans taken by private equity firms in order to finance their buy-outs prior to the crisis relied on a huge appetite of Collateralized Loan Obligations (CLOs). Now, many of these CLOs are about to the reach their maturity, i.e. they are being unwound, and this removes an important source of funding. In 2014, driven partly by new capital requirements on banks, almost no CLOs will remain, at least as new funding sources, and that will, I guess, put pressure on private equity deals.

Ecco, just another negative development in high finance and just another piece of bad news for the over-extended and over-borrowed part of the financial system!

OSK 2012 Outlook: Be Nimble in the "Way of the Market"

OSK have a Neutral outlook on the Malaysian market going into 2012 as the combination of uncertain growth outlook in the US and Asia coupled with a possible recession in Europe cloud the prospects for strong earnings growth locally. While Malaysia is likely to avoid slipping into recession, the deficit reduction exercises undertaken by Eurozone economies may well tip their slow growing economies into a recession.

In any case, for Malaysia, OSK see earnings growth slipping to between mid single digits and low double digits, a pale shadow of what it was in 2006, 2007 and 2010 when earnings growth came in between 20 to 30%. Newsflow on developments surrounding the handling of sovereign debt in Europe and US will also likely to lead to volatile markets worldwide. As such, in the short term, we are faced with volatile markets which will likely give way to a dampened economic outlook. OSK advise investors stay cautious into mid 2012 and focus on Defensive sectors such as Consumer, Telco, Healthcare and Media. OSK's 2012 KLCI fair value is 1466 points based on a PER of 13.5x or 1 standard deviation below the historical average of 16.6x given the uncertain market conditions.

But, there are opportunities to TRADE?

That being the case, despite the overall Neutral stance, the volatility expected should give rise to plenty of Trading Opportunities. OSK advise investors to Trade on Cyclical sectors such as Banks, Oil & Gas and Construction as the market dips or rallies strongly. The trading strategy to adopt is:

• Buy when the KLCI falls towards the 1300 points level as the broader market then offers a 10% upside to 2012 fair value. As Malaysia is not likely to enter into recession, earnings contraction was expected and value should emerge closer to 1300 points. A combination of still positive earnings growth, low foreign shareholding and the Economic Transformation Programme (ETP) should mean Banks (leading the economy), O&G and Construction (beneficiaries of the ETP) will present good entry points at that level of the market.

• Sell when the KLCI rises towards the 1500 points level as the market will be overpriced then. Fundamentals remaining weak. Although the 3Q2011 earnings season may have seen a slight improvement q-o-q, most of the improvement was focused on the Small caps where analysts have had time to pare down forecasts. On the flipside, Big caps continued to slide with the potential for more downgrades in the coming 2 quarters.

What are the sectors to focus on?

Which are the Top Picks?

Among the defensive stock calls, the Top 10 Defensive Buys are namely:

1) Axiata (FV: RM5.60) – The only listed Malaysian telco company that also offers a regional footprint in Indonesia, Singapore, India, Bangladesh, Sri Lanka and Cambodia. Still the cheapest Malaysian telco company at 13x PER.

2) Petronas Gas (FV: RM15.52) – Natural gas processor, importer and transmitter in Peninsular Malaysia with 80% of profits guaranteed by its mother company, Petronas. Growth catalyst in the form of new LNG import terminal in Melaka.

3) Telekom Malaysia (FV: RM5.15) – Incumbent fixed-line telecoms provider in Malaysia. Making waves via its new high-speed Internet offering Unifi that is acquiring new subscribers at a rate of 1,000 per day. Highest yields at 10–12%.

4) Guinness Anchor (FV: RM13.58) – Broadest brewery offering translates into defensive earnings in the event of an economic slowdown. Decent yields, coupled with the 2012 growth potential coming from the UEFA 2012 football tournament.

5) AirAsia (FV: RM4.57) – Largest Low Cost Carrier (LCC) in Asia; continues to outperform its regional airline peers. Potential IPO of regional associates and benefits from a partnership with MAS will be the catalysts for 2012.

6) KPJ Healthcare (FV: RM5.21) – Largest private hospital provider in Malaysia, which is growing its hospital chain by another five hospitals from the current 21 over the next three years. Growth areas are medical tourism and retirement care.

7) QL Resources (FV: RM3.62) – Largest manufacturer of surimi in ASEAN and second largest producer of eggs in Malaysia. It is replicating its business in Indonesia and Vietnam over the next 12 months.

8) Media Chinese International (FV: RM1.51) – Largest publisher of Chinese language newspapers in Malaysia. To benefit from falling newsprint prices in 2012.

9) Supermax (FV: RM5.50) – Second largest rubber glove maker in the world, which will benefit from a fall in latex prices, while demand remains resilient.

10) TRC Synergy (FV: RM0.76) – Leading Bumiputera contractor. Shortlisted for various packages in the KL MRT project and should be assured of some contracts over the next 12 months.

Source: OSK Research