KUALA LUMPUR: AmResearch is introducing its 2011's fair value for the FBM KLCI at 1,620 ' pegged to a forward PE of 15 times.
'We forecast corporate earnings to expand by a slower 14% in 2011 (2010: 25%). Our fair value implies a modest 7% upside from the current level,' it said in its market strategy issued on Thursday, Nov 11.
AmResearch said this reflected its cautious stance on the broader market in an extended liquidity-driven rally, which going by precedents has already turned out to be the longest trough-to-peak re-rating cycle since 1998.
Hence, there is admittedly some nervousness in the market. Corporate earnings momentum has stalled as evident from IBES consensus estimates. Nonetheless, liquidity is in abundance and the weakness in the US$ should sustain indiscriminate portfolio flows in the aftermath of QE II.
AmResearch said the US Fed plans for an additional US$600bil of quantitative easing till end 2Q11 with the commitment to engage in further asset purchases until the recovery is entrenched.
The research house said sure, there is no certainty that QEII will be effective in reviving growth but its implementation would drive down long term funding costs and accentuate the decline in the US$.
'QEII will be the most important macro parameter influencing the direction of our market in the coming quarters because liquidity creation is very significant. It may also trigger a rebalancing of the global economy, leading to further appreciation of Asian currencies, including the ringgit,' it pointed out.
AmResearch said the key risks to its bullish view are the potential administrative and capital controls to contain the influx of 'hot' money. Taiwan recently imposed limits on bond holdings by foreigners, while Thailand increased taxes on foreign purchases of local bonds. South Korea and Indonesia have imposed similar restrictions on foreign flows.
Thus far, Bank Negara Malaysia has yet to impose any policy restrictions to rein in any potentially disruptive capital inflows.
'With QEII leading to a disconnect between the real economy and financial markets, the reflation trade is our key theme. The debasement of the US$ will sustain the rally in commodities due to robust liquidity flows as opposed to genuine demand,' it said.
AmResearch continued to OVERWEIGHT the PLANTATION [], steel and oil & gas sectors. In particular, the market has underestimated the swift and steep rise in CPO prices to RM3,420/mt currently. Earnings upgrades appear imminent.
Its top picks are IOI Corp, KLK and IJM Plantations, in that order of preference.
On the oil & gas front, it likes Malaysian Marine and Heavy Engineering, given its ownership of the country's strategic fabrication yard for deepwater structures. But, valuation looks rich at a forward PE of 18x. Kencana is a cheaper and equally attractive liquid proxy with a good earnings track record and potential M&As to move up the value chain.
On the flipside, rising feedstock prices and input costs may hurt profit margins of consumer stocks ' F&N, KFCH, brewers and other consumer staples, where selling prices may not rise fast enough to offset escalating cost pressure.
Exporters namely the gloves companies are also net losers. The weakness in the US$ would exacerbate margin compression, delaying a bottoming in its earnings cycle. It remains UNDERWEIGHT.
Property equities should re-rate in tandem with rising inflation expectations from a rampant built-up in domestic liquidity and a cheap ringgit. Policy concern is already behind us post the recent 70% cap on loan-to-value for the purchase of third property. Buying interests should be driven by several catalytic presales, prolific land deals and earnings delivery particularly for IJM Land and SP Setia.
That aside, AmResearch expects the REIT sector to be boosted by yield compression with falling real interest rates, lifting unit prices. CMMT offers the best exposure to the REIT sector.
'We are NEUTRAL on the banking sector but bottom-up, we are Buyers of CIMB and Maybank as liquidity proxies to the rising market. We are Buyers of IJM and Gamuda, as share prices have retraced from the recent peaks. 2011 will see the government rolling out large infrastructure projects, underpinning newsflow momentum on the sector. AirAsia remains a BUY because of its entrenched franchise value in Asia and compelling valuations,' it said.
The research house said its high conviction mid-cap BUY is Press Metal, the leading aluminium smelter in the region.
With first mover access to 'cheap'' power for its flagship plant in Mukah, Sarawak, Press Metal is emerging as one of the most competitive aluminium producers in Asia-Pacific. It is on track to deliver exponential earnings growth from capacity expansion. Press Metal is also under-researched and under-owned. It is a direct beneficiary of the commissioning of Bakun.
'We forecast corporate earnings to expand by a slower 14% in 2011 (2010: 25%). Our fair value implies a modest 7% upside from the current level,' it said in its market strategy issued on Thursday, Nov 11.
AmResearch said this reflected its cautious stance on the broader market in an extended liquidity-driven rally, which going by precedents has already turned out to be the longest trough-to-peak re-rating cycle since 1998.
Hence, there is admittedly some nervousness in the market. Corporate earnings momentum has stalled as evident from IBES consensus estimates. Nonetheless, liquidity is in abundance and the weakness in the US$ should sustain indiscriminate portfolio flows in the aftermath of QE II.
AmResearch said the US Fed plans for an additional US$600bil of quantitative easing till end 2Q11 with the commitment to engage in further asset purchases until the recovery is entrenched.
The research house said sure, there is no certainty that QEII will be effective in reviving growth but its implementation would drive down long term funding costs and accentuate the decline in the US$.
'QEII will be the most important macro parameter influencing the direction of our market in the coming quarters because liquidity creation is very significant. It may also trigger a rebalancing of the global economy, leading to further appreciation of Asian currencies, including the ringgit,' it pointed out.
AmResearch said the key risks to its bullish view are the potential administrative and capital controls to contain the influx of 'hot' money. Taiwan recently imposed limits on bond holdings by foreigners, while Thailand increased taxes on foreign purchases of local bonds. South Korea and Indonesia have imposed similar restrictions on foreign flows.
Thus far, Bank Negara Malaysia has yet to impose any policy restrictions to rein in any potentially disruptive capital inflows.
'With QEII leading to a disconnect between the real economy and financial markets, the reflation trade is our key theme. The debasement of the US$ will sustain the rally in commodities due to robust liquidity flows as opposed to genuine demand,' it said.
AmResearch continued to OVERWEIGHT the PLANTATION [], steel and oil & gas sectors. In particular, the market has underestimated the swift and steep rise in CPO prices to RM3,420/mt currently. Earnings upgrades appear imminent.
Its top picks are IOI Corp, KLK and IJM Plantations, in that order of preference.
On the oil & gas front, it likes Malaysian Marine and Heavy Engineering, given its ownership of the country's strategic fabrication yard for deepwater structures. But, valuation looks rich at a forward PE of 18x. Kencana is a cheaper and equally attractive liquid proxy with a good earnings track record and potential M&As to move up the value chain.
On the flipside, rising feedstock prices and input costs may hurt profit margins of consumer stocks ' F&N, KFCH, brewers and other consumer staples, where selling prices may not rise fast enough to offset escalating cost pressure.
Exporters namely the gloves companies are also net losers. The weakness in the US$ would exacerbate margin compression, delaying a bottoming in its earnings cycle. It remains UNDERWEIGHT.
Property equities should re-rate in tandem with rising inflation expectations from a rampant built-up in domestic liquidity and a cheap ringgit. Policy concern is already behind us post the recent 70% cap on loan-to-value for the purchase of third property. Buying interests should be driven by several catalytic presales, prolific land deals and earnings delivery particularly for IJM Land and SP Setia.
That aside, AmResearch expects the REIT sector to be boosted by yield compression with falling real interest rates, lifting unit prices. CMMT offers the best exposure to the REIT sector.
'We are NEUTRAL on the banking sector but bottom-up, we are Buyers of CIMB and Maybank as liquidity proxies to the rising market. We are Buyers of IJM and Gamuda, as share prices have retraced from the recent peaks. 2011 will see the government rolling out large infrastructure projects, underpinning newsflow momentum on the sector. AirAsia remains a BUY because of its entrenched franchise value in Asia and compelling valuations,' it said.
The research house said its high conviction mid-cap BUY is Press Metal, the leading aluminium smelter in the region.
With first mover access to 'cheap'' power for its flagship plant in Mukah, Sarawak, Press Metal is emerging as one of the most competitive aluminium producers in Asia-Pacific. It is on track to deliver exponential earnings growth from capacity expansion. Press Metal is also under-researched and under-owned. It is a direct beneficiary of the commissioning of Bakun.
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