Market Outlook & Strategy 2Q2010 : Volatile Market Uptrend Amid Policy Normalisation - 31/01/2010

8/9/2019 Market Outlook & Strategy 2Q2010 : Volatile Market Uptrend Amid Policy Normalisation - 31/01/2010

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Market Outlook& Strategy 2Q2010

Volatile Market Uptrend Amid

Policy Normalisation

Executive Summary

Please read important disclosures at the end of this report.

31 M arch 2010

Malaysia

PP

7767/09/2010(025354)

M

ARKET

DA

TELINE

The prospects of a sustainable global economic recovery have improved in recent

months despite the emergence of sovereign debt worries of late. This augurs well for

the countrys exports, which coupled with strengthening domestic private sector demand

will see the Malaysian economy rebounding to expand by 4.5% in 2010. Similarly,

the recovery in corporate earnings has gained momentum and the normalised net EPS

for the FBM KLCI stocks under our coverage is projected to bounce back sharply from

a contraction of 14.2% in 2009 to a double-digit growth of 15.3% each in 2010 and2011.

Whilst both the economic and corporate earnings recoveries are gaining pace, valuations

are also back to normal levels. It is, however, still a very under-owned market by

foreign investors and potentially, the market could be re-rated if foreign investors turn

positive on the countrys economic reforms to bring about a more competitive economy.

Meanwhile, we expect external events to dominate market movements and any global

policy changes will likely cause the market to be volatile. Our year-end FBM KLCI

target, however, remains unchanged at 1,400 or 15x 2011 earnings.

In our view, any significant weakness in the market is an opportunity to accumulate

quality stocks for longer-term performance as we believe that a global sovereigncredit problem will unlikely unfold and the global economic recovery is more sustainable

than feared. Nevertheless, investors would have to factor in the anticipated global

policy changes, rebalance their portfolios and prepare for greater market volatility

ahead.

Stock picking is key. The challenge is to look for Alpha+ stocks, including recovery

leaders and quality cyclicals that have a strong leverage to the economic recovery.

In our view, the banking sector would continue to benefit from the economic recovery,

while pent-up demand and new applications will likely attract new focus into the

semiconductor industry. In addition, a base tariff review, which coupled with fundamental

recovery in electricity demand, should augur well for TNB in the power sector, while

strong data traffic and attractive dividend yields would present good investmentthemes for the telco sector.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for downloadfrom www.rhbinvest.com


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STRATEGY PAPER2


CONTENTS

EX ECUTIVE SUM M ARY 1

M ACRO ECONOM IC OUTLOOK 3

M ARKET REVIEW 10

M ARKET OUTLOOK 13

M ARKET STRATEGY 20

FBM KLCI FROM THE TECHNICAL PERSPECTIVE 24

SECTOR COVERAGE

Banking 26

Building M aterials 28

Construct ion 30

Consumer 32

Gaming 34

Inf rastructure 36

Insurance 38

M anufacturing 40

M edia 42

M otor 44

Oil & Gas 46

Plantat ion 49

Pow er 52 Property 54

Sem iconduct or & Inf orm at ion Technology 56

Telecommunicat ions 58

Timber 60

Transportat ion 62

APPENDIX

Valuations and Ratings of Individual Stock s 6 4

Under Coverage


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3STRATEGY PAPER


Macro Economic Outlook

The Malaysian economy emerged from a recession in the 4Q of last year,

underpinned by the Governments stimulus spending and a recovery in exports.

We expect the export recovery to be sustained in 2010 despite various

challenges that threaten to derail it. Similarly, we expect domestic demand to

gain momentum, underpinned by a pick-up in consumer spending, while

businesses will likely resume their investment during the year. As a whole, we

expect the Malaysian economy to expand by 4.5% in 2010, from -1.7% in 2009.

As the Malaysian economic recovery gains pace, the Government has unveiled

a new economic model (NEM) on 30 March to chart the direction for the

countrys development towards 2020. The current account surplus in the

balance of payments will likely narrow, as the recovery of the economy will suck

in more imports. The surplus, however, will remain large and provide an

underlying support to the ringgit, which is projected to strengthen to RM3.20/

US$ by end-2011. Inflation will likely trend up but remain manageable at 2.0%

in 2010. The Central Bank will likely raise the OPR by another 25 basis points

to 2.5% in July.

Economic Recovery Strengthening

Like many other countries in this region and the developed economies, the Malaysian

economy emerged from a recession in the 4Q of last year, underpinned by a

recovery in exports and the Governments stimulus spending. We expect the export

recovery to be sustained in 2010 despite various challenges that threaten to derail

it, including budget deficit and debt woes in some countries in the Euroland, concerns

over a double dip in the global economic recovery as government spending fizzles

out and policy tightening on the back of asset price inflation in Asia and emerging

economies. Similarly, we expect domestic demand to gain momentum, and

consumer and business spending to gradually take up the slack left by the fiscal

stimulus spending when it fizzles out in 2H 2010. This will likely be underpinned by

a pick-up in consumer spending, on the back of an improvement in job market. In

the same vein, investors will likely resume their investment given brightening

economic prospects. As a whole, we expect the Malaysian economy to expand

by 4.5% in 2010, compared with -1.7% in 2009.

A New Economic Model To Lead The Country Forward

As the Malaysian economic recovery gains pace, the Government unveiled a new

economic model (NEM) on 30 March to chart the direction for the countrys

development towards 2020. The NEM contains eight strategic reform

initiatives (SRIs) to help the country transform itself into a high-income economy

by the year 2020. Among the proposed action plans are strategies to re-energise

the private sector to drive growth, creating a competitive domestic economy via thephasing out of subsidies and price controls, a revamping of affirmative action policies

and reducing the dependent on foreign workers as well as measures to promote

sustainability of growth.

The NEM sets a target to achieve an average economic growth of 6.5% a year

over 2011-2020. Although the growth target set is more ambitious than an

average growth of 4.3% a year achieved in 2001-09, it has to be the case in order

to encourage people to work harder and to surpass what was achieved in the last

nine years. However, we believe it is not an easy task given the presence of

global imbalances and countries such as China, Vietnam, India and Indonesia have

become attractive hosts for foreign direct investment (FDI). Also, policy measures

have to be well executed in order to ensure the success implementation of the NEM

to bring about a more competitive and higher income economy. Under the NEM, the

Government aims to push the GNP per capita to US$17,725 by 2020, from the

current level of US$7,558.

We expect the economy

to expand by 4.5% in

2010, compared with a

recession in 2009, on the

back o f a p i c k -up i n

exports and strengthening

domestic demand

The NEM contains e ight

s t ra t eg i c re fo rm

in i t i a t i ves a imed at

assist ing the country to

ach i eve a more

compet i t i ve and h igh

income economy by the

year 2020

The NEM sets a target to

ach i eve an ave rage

economic growth of 6.5%

a year over 2011-2020 , but

we believe it is not an easy

task


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STRATEGY PAPER4


At the same time, the National Economic Advisory Council (NEAC) vows to adopt

a new w ay of doing things in order to help it achieve its growth target. However,

not all the approaches such as growth through productivity, private sector-led

growth, cluster economic activities and retain skilled workers are new , in our view.

These approaches have been adopted in the last few Malaysia economic plans, but

the results left much to be desired, partly because of greater competition for FDI

from other emerging economies, the lack of skilled labour and less business friendly

public delivery system.

Whilst the NEM will chart new direction for the economy, we believe the impact will

only be felt more significantly over the medium term given the challenges

that the country is facing. The country is suffering from brain drain and the shortage

of skilled manpower for it to move up the value chain and to be transformed into

a services-based economy. Meanwhile, Malaysian companies are venturing abroad

in search for growth and business opportunities, while the country is facing keen

competition in attracting foreign direct investment (FDI). As a result, the country

suffered a net outflow of direct investment in the last three consecutive years.

Indeed, we believe the successful implementation of the NEM still l ies with the

execution of key policy initiatives and the political will to force throughchanges. Whilst the launching of a Government Transformation Programme on 28

January to improve the Governments delivery system is a good start, much remains

to be done to bring about a more competitive high-income economy.

Normalisation Of Extremely Loose Monetary Conditions Has Begun

In Some Countries

Meanwhile, the prospects of a sustainable global economic recovery have

improved in recent months, in our view, despite various challenges that threaten

to derail it. This is primarily on account of a combination of factors, including

aggressive policy stimulus around the globe where policymakers are unlikely to roll

it back prematurely, significant improvement in financial markets and risk appetiteof investors and more importantly, asset prices have reached a favourable inflection

point. Unlike during the crisis, investors are no longer fearful of catching a falling

knife and more substantial weakness in asset prices will be taken as investment

opportunities. As a result, policymakers around the globe have begun to exit their

extremely loose policy and emergency lending programmes, but the process

remains gradual in our view, suggesting that its impact on economic activities will

unlikely be significant.

Global Economic Recovery Picking Up Momentum

Indeed, the global economic recovery is gaining momentum. As it stands,

global manufacturing activities have recovered to positive growth for the lastseven consecutive months, albeit at a more moderate pace in February, while

services activities strengthened during the month (see Chart 1). Similarly, the

OECD composite leading indicators 12-month rate of change strengthened to 9.6%

in January, the fifth successive month of increase and from +8.1% in December and

+6.0% in November (see Chart 2). The improvement was across the board,

suggesting that prospects of OECD countries economies are likely to improve in the

months ahead.

In the US, the economy grew at a stronger pace in the 4Q, underpinned by inventory

rebuilding and an increase in business spending. The improvement is gradually

trickling dow n to a better job market, as indicated by employment of temporary

workers, which picked up for the last five consecutive months up to February. As

a result, non-farm payrolls recorded a significantly smaller drop of an average of

31,000 jobs a month in January-February, compared with a loss of 557,000 a month

in 1H 2009. Similarly, the personal consumption expenditure (PCE) strengthened to

an annualised rate of 2.1% in January, from +1.7% in December and after hitting

The g l oba l e conom i c

recove ry i s ga i n i ng

momentum

Prospects of a sustainable

global economic recovery

have improved in recent

months and t he

normalisat ion of pol ic ies

has begun i n some

countries

The impact of the NEM,

however, will only be felt

more s ign i f i cant l y over

the medium term given

the chal lenges that the

country is facing

The success of the NEM

still lies with the executionand the pol it ical wi l l to

force through changes

Improvement in the US

economy i s g radua l l y

trickling down to a better

job market and a

sus t a i ned i nc rease i n

consumer spending

The NEAC vows to adopt a

new w ay of doing things in

order to help it to achieve

i t s g rowth t a rge t


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5STRATEGY PAPER


The Eurolands economy

will l ikely improve, while

exports recovery will l ift

the Japanese and Chinese

economies

The g l oba l e conom i c

recove ry i n 2010 w i l l ,

however, remain uneven

The countrys real exports

are projected to record a

growth in 2010

Domes t i c demand i s

projected to rise by 3.2%

in 2010 , d r i ven by an

i nc rease i n consumer

spending

Chart 2OECD Composite Leading

Indicator Points To Brighter EconomicProspects

% 12-mth annualised rate of change

-20

-15

-10

-5

0

5

10

15

20

25

30

00 01 02 03 04 05 06 07 08 09 10

Total OECD Japan US Euro area China

S o u r c e : O EC D

Chart 1Global Manufactur ing And Serv ices

Act iv i t ies P ick ing Up

Index

S o u r c e : M a r k i t Ec o n o m i c s

ISMManufacturing

ISMServices

30

35

40

45

50

55

60

65

05 06 07 08 09 10

a low of +1.1% in November. Although an improvement in the housing sector has

weakened somewhat, it will unlikely pose a major drag to the US economic recovery.

As a whole, the US economy will likely recover to around +3.0% in 2010, from-2.4% in 2009.

Similarly, we expect the Euroland s economy to gradually recover, despite the

emergence of sovereign debt worries of late. Given its export dependency, the

Japanese economic recovery will likely be sustained into 2010 as well, in tandem

with a recovery in exports. In the same vein, Chinas economy will likely continue

to expand in the months ahead, after recording +10.7% yoy in the 4Q. Meanwhile,

the Chinese authorities have stepped up their efforts to control credit expansion,

particularly to local governments, in a move to moderate the pace of asset price

inflation and reduce the potential risks of default.

The global economic recovery in 2010 w ill, however, remain uneven, in ourview, given sustained high unemployment situation in the key developed countries,

debt problems in some of the European countries, and deflation in Japan.

Exports On The Path To Recovery

As a whole, we expect a pick-up in global economic activities to translate into higher

demand for the countrys manufactured goods and commodity products. We expect

the countrys real exports to record a growth of 6.5% in 2010 , a rebound from

-10.1% in 2009.

Domestic Demand Will Likely Improve

Domestically, consumer and business confidence will likely improve further and

translate into stronger spending, on the back of an improvement in economic

prospects. As a result, domestic demand is projected to rise by 3.2% in 2010

(see Table 1), compared with -0.4% in 2009. This will likely be driven by an increase

in consumer spending, which is envisaged to grow at a stronger pace of 4.8% in

2010, after slowing down to +0.8% in 2009. The pick-up in consumer spending will

be underpinned by an improvement in the job market, while firmer commodity prices

will encourage rural households to spend. Also, the Government has put in more

efforts to promote the tourism industry and measures to encourage consumer

spending in the 2010 Budget. Similarly, we believe high savings and rising

consumerism as well as pent-up demand will continue to provide support to

consumer spending in the country.


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STRATEGY PAPER6


In the same vein, we believe the private investment will likely bounce back in

2010, albeit from a low base, as investors resume their investment and capacity

utilisation rate rises on the back of an improvement in global economic outlook.

These will likely be enhanced by an improvement in business confidence. Public

investment , however, is projected to contract in 2010, in line with a cutback in

development expenditure by the Federal Government due to fiscal consolidation.

This will likely be made worse by a sharper drop in non-financial public enterprises

(NFPEs) development spending during the year. Still, fixed capital formation is

envisaged to increase by 3.0% in 2010, a rebound from -5.5% in 2009, as a pick-

up in private investment will mitigate the decline in public investment. Meanwhile,public consumption will likely contract during the year, in line with the Governments

efforts to cut its budget deficit.

Fiscal Consolidation Will Hold Back Growth

In its 2010 Budget, the Federal Government has undertaken a bold move to reduce

its budget deficit, after rising sharply due to the implementation of two economic

stimulus packages totaling RM67bn to cushion the Malaysian economy from a severe

global recession. As a result, the Federal Governments budget deficit is

projected to narrow significantly to 5.6% of GDP or RM40.5bn in 2010, from

a deficit of 7.0% of GDP or RM47.4bn in 2009. Indeed, the budget deficit incurred

in 2009 was smaller than the initial estimate of 7.4% of GDP or RM51.1bn due partlyto a smaller-than-expected development expenditure. The bold move to contain its

budget deficit, in our view, will prevent the countrys sovereign credit rating

from deteriorating. This remains a key concern to the authorities, after the Fitch

Rating Agency downgraded Malaysias long-term local currency rating to single-A on

9 June 2009, from single-A-plus, on concerns over the countrys ballooning budget

deficit. The Governments move, together with a cutback in development

expenditure by non-financial public enterprises (NFPEs), however, will contribute to

a projected reduction of 0.8 percentage point from real GDP growth in 2010.

2007 2008 2009 2008 2009 2010(f) 2011(f)

4Q 1Q 2Q 3Q 4Q

% Growth in Real Terms

GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0

Consumption:

Private 10.4 8.5 0.8 5.3 -0.7 0.5 1.5 1.7 4.8 6.0

Public 6.5 10.9 3.7 12.7 2.1 1.0 10.9 1.3 -2.5 4.5

Total investment 9.6 0.8 -5.5 -10.2 -10.8 -9.6 -7.9 8.2 3.0 8.2

Private 11.8 0.8 -21.8 n.a n.a n.a n.a n.a 10.0 12.7

Public 7.1 0.7 12.9 n.a n.a n.a n.a n.a -1.5 4.9

Goods & services:

Exports 4.5 1.3 -10.1 -13.3 -15.2 -17.3 -13.4 7.3 6.5 7.7

Imports 6.0 1.9 -12.5 -10.2 -23.5 -19.7 -12.9 6.9 9.9 9.1

Agg.domestic demand 9.6 6.8 -0.4 2.8 -2.9 -2.2 0.4 3.0 3.2 6.3

(f): RHBRI's forecasts

Table 1GDP By Demand Aggregate (2000=100)

The Federal Governments

budget deficit is projected

to narrow significantly to

5.6% of GDP or RM 40.5bn

in 2010, from a deficit of

7.0% of GDP or RM 47.4bn

in 2009

Pr ivate inves tment w i l l

l i ke ly bounce back but

pub l i c spend i ng i s

p ro jec ted to cont rac t

during the year


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7STRATEGY PAPER


Table 2GDP By Industr ial Origin At 2000 Prices

2007 2008 2009 2008 2009 2010(f) 2011(f)

4Q 1Q 2Q 3Q 4Q

% Growth in Real Terms

GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0

Agriculture 1.4 4.0 0.4 0.5 -4.3 0.3 -0.5 6.0 2.3 2.8

Mining 2.0 -0.8 -3.8 -5.7 -5.2 -3.6 -3.5 -2.8 1.2 2.0

Manufacturing 3.1 1.3 -9.3 -8.8 -17.9 -14.5 -8.6 5.3 7.5 8.0

Construction 4.7 2.1 5.7 -1.6 1.1 4.5 7.9 9.2 3.1 2.8

Services 9.6 7.2 2.6 5.7 -0.2 1.6 3.4 5.1 4.5 4.7

(f) : RHBRI's forecasts

Manufacturing Sector To Bounce Back And Services Sectors To

Strengthen

On the supply side, we envisage a broad-based recovery in economic activities from

manufacturing to services, construction, agriculture and mining sectors. Value added

in the manufacturing sector is projected to bounce back and expand by 7.5% in

2010, from -9.3% in 2009 (see Table 2). Growth will likely be driven by a pick-up

in output of export-oriented industries, on the back of an improvement in globaldemand for the countrys exports. Similarly, output of domestic-oriented industries

will likely pick up, on account of an improvement in consumer spending and private

investment.

Min i ng va l ue added i s

p ro j ec t ed t o i n c rease

modestly in 2010

Ag r i cu l t u re sec t o r i s

env i saged t o rebound ,

mainly on account of a

p i c k -up i n pa lm o i l

production

The se rv i c es sec t o r i s

p ro jec ted to g row at a

faster pace, as consumer

spend i ng and t rade

activities pick up

Const ruc t ion ac t i v i t i es ,

however , w i l l l i k e l y

moderate due to f i sca l

consolidation

Manufacturing sector will

rebound in 2010, on the

back o f a p i c k -up i n

expo r t s and domes t i c

demand

In the same vein, the broad services sector is projected to grow at a faster

pace of around +4.5% in 2010, compared with +2.6% in 2009, in line with higher

consumer spending and trade activities. Also, the Governments efforts to promote

the sector and a sustained increase in tourist arrivals as a result of an improvement

in confidence will boost activities in the sector. As a result, we expect activities in

transport & storage sub-sector to turn around during the year. At the same time,

activities in communications, wholesale & retail trade and accommodation &

restaurants sub-sectors will likely strengthen. We also expect activities in finance &

insurance and real estate & business sub-sectors as well as output of utilities to pick

up, in tandem with an improvement in business activities during the year.

The agriculture sector is also envisaged to bounce back to +2.3% in 2010,

after slowing down to +0.4% in 2009. This is on account of a pick-up in palm oil

production due to the low base effect as well as expanded matured areas. At the

same time, the decline in output of saw logs will likely narrow further during the year,

after falling by a smaller magnitude in 2009. Similarly, the production of rubber will

likely bounce back during the year, given better pricing and after going through three

consecutive years of decline. Meanwhile, the non-commodity sub-sector such as

fisheries, livestock and crops will contribute to growth as well, on the back of the

implementation of various projects by the Government.

Similarly, we expect mining output to record a modest growth of 1.2% in

2010, after two consecutive years of contraction and compared with -3.8% in 2009.

This is mainly on account of a pick-up in the production of crude oil and liquefied

natural gas (LNG) due to higher demand. Also, several new oil fields are expected

to start production, while the expansion of MLNG Dua is expected to increase

production of LNG during the year.

In tandem with a slower increase in the Governments development expenditure,

construction activities are projected to moderate to 3.1% in 2010, from

+5.7% in 2009. As a result, we expect the growth in civil engineering sub-sector

to moderate during the year. This, however, will likely be mitigated by a pick-up in

construction activities in the residential property sub-sector as demand conditions

have improved and property developers are coming up with more launches, while

construction activities in non-residential property sub-sector are still ongoing.


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Monetary And Loan Expansion To Remain Supportive Of Economic

Growth

The broader money supply, M3, moderated to +7.9% yoy in January 2010, after

reaching a high of +10.0% in November. Despite the moderation, growth remained

commendable, indicating that the underlying economic activities are still expanding.

Going forward, we expect monetary policy to remain supportive of economic

growth and M3 will likely pick up to around 10.5% in 2010, from+9.1% at end-

2009, in line with a pick-up in economic activities.

Loan growth, however, strengthened to 8.6% yoy in January, from +7.8% in

December and a low of +7.0% in November. This was the strongest growth in eight

months, underpinned by a pick-up in corporate and household borrowings during the

month. Going forward, we expect the banking systems loans to expand by 9.0%

in 2010, from 7.8% in 2009, in tandem with the pick-up in the economy.

In terms of asset quality, the expansion in loan base, coupled with the recovery in

non-performing loans (NPLs) and bad debt written-off, further reduced the banking

systems NPL ratios. As a result, the 3-month gross NPL ratio of the banking system

eased to 3.20% of total loans in January, from 3.36% in November and a high of

4.11% in January last year. Similarly, the 3-month net NPL ratio fell to 1.73% of

total loans in January, from 1.92% in November and 2.20% a year ago. Goingforward, NPLs will likely improve in 2010, in line with the recovery in the

economy. As a whole, we expect the banking systems 3-month gross and net NPL

ratios to ease to around 3.0% and 1.5%, respectively, by end-2010, compared with

3.2% and 1.8%, respectively, at end-2009.

Current Account Surplus To Narrow And Ringgit Will Likely

Appreciate

In tandem with a pick-up in economic activities, imports are expected to rise faster

than that of exports. This will lead to a smaller merchandise trade account surplus

in 2010. At the same time, we envisage the deficit in the income account to widen

during the year, as non-resident controlled companies repatriate higher dividend on

the back of improving corporate earnings. These, however, will likely be mitigatedby an improvement in the services account, which is projected to record a larger

surplus during the year, in line with a pick-up in travel receipts. Similarly,

repatriations of salaries and wages by foreign workers are likely to drop, in line with

the Governments policy of reducing the employment of foreign workers. As a

result, we expect the current account surplus of the balance of payments to

narrow to around RM97.1bn or 13.4% of GNI in 2010, from a surplus of

RM112.7bn or 17.3% of GNI in 2009 (see Table 3). Still, the current account surplus

remains sizeable and will contribute to a build-up in the countrys foreign exchange

reserves and fuel domestic liquidity in the financial system.

The NPL ratios are likely

to improve in 2010

The cu r ren t ac coun t

surplus of the balance of

payments is projected to

narrow in 2010

Loans will pick up in 2010,

in tandem with a recovery

in the economy

Monetary policy to remain

support i ve o f economic

growth

Table 3Balance Of Payments

2008 2009 2008 2009 2010(f) 2011(f)

4Q 1Q 2Q 3Q 4Q

(RMbn)

Current account 129.5 112.7 29.6 31.4 28.8 25.3 27.3 97.1 98.5

(% of GNI) (18.1) (17.3) n.a n.a n.a n.a n.a (13.8) (13.0)

Goods 170.6 141.5 38.8 37.0 33.1 33.4 38.0 133.2 132.9

Services 0.2 3.2 0.4 2.5 1.0 0.1 -0.4 1.1 1.7

Income -23.7 -12.6 -5.6 -3.9 -1.5 -1.6 -5.5 -22.2 -23.1

Current transfers -17.5 -19.4 -4.0 -4.2 -3.9 -6.7 -4.7 -15.0 -15.0

Capital account 0.6 -0.2 -0.0 -0.0 -0.0 -0.0 -0.0 0.0 0.0

Financial account -118.5 -82.9 -71.8 -29.8 -24.2 -11.1 -17.9 -35.5 -21.5

Errors & omissions* -29.9 -15.7 -19.6 1.7 -2.4 -2.7 -12.3 -25.0 -20.0

Overall balance -18.3 13.9 -61.9 3.3 2.1 11.5 -3.0 36.6 57.0

Outstanding reserves^ 317.4 331.3 317.4 320.7 322.9 334.4 331.4 367.9 424.9

(US$)^ 91.5 96.7 91.5 87.8 91.5 96.0 96.7 111.5 132.8

(f): RHBRI's forecast ^: As at end-period

* : Reflect mainly revaluation gains/losses from Ringgit depreciation/appreciation and statistical discrepancies


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9STRATEGY PAPER


Capitaloutflow , on the other hand, will likely ease further to RM35.5bn in 2010,

after slowing down to RM82.9bn in 2009. This is on account of a pick-up in portfolio

investment in 2010, after recording a small inflow in 2009, in line with an

improvement in the countrys economic prospects. Similarly, net direct investment

is projected to record a net inflow in 2010 due to higher inward direct investment,

as investors resume their investment, in tandem with an improvement in global

economic prospects. These, however, will likely be offset partially by an increase

in Malaysians other investments abroad, including loans and trade credits, as

businesses look for new opportunities overseas.

As a whole, the overall balance of payments is projected to record a larger

surplus of around RM36.6bn in 2010, compared with a surplus of RM13.9bn in 2009,

after taking into account a larger deficit in errors & omissions. Consequently, the

countrys foreign exchange reserves will likely increase to US$111.5bn by end-2010,

from US$96.7bn at end-2009.

The build-up in foreign exchange reserves will continue to provide an underlying

support to the ringgit. The movement of the ringgit, however, has been volatile in

recent months, as investors adjusted to changes in policy and the pace of economic

recovery. This was further complicated by concerns over Greeces deficit problem

that had weighed down the euro. As a whole, the ringgit has overshot RM3.30/US$due to inflow of speculative funds, as Asian currencies (ex-Japan) strengthen against

the US dollar on account of a stronger economic recovery in Asia and a faster pace

of policy normalisation. We believe this will likely be temporary and the ringgit will

likely settle at around RM3.30/ US$ by end-2010 and at RM3.20/US$ by end-

2011. Based on the real effective exchange rate (REER) model, the fair value of

the ringgit is currently estimated at around RM3.43/US$.

Higher Price Pressure In 2010, But Manageable

Despite the Chinese New Year celebration, the headline inflation rate moderated

to 1.2% yoy in February, from +1.3% in January but higher than +1.1% in

December. This was the first easing after two consecutive months of picking up,indicating that price pressure has eased somewhat, as traders might have difficulties

in raising prices given that economic recovery is still at its early stage. Going

forward, inflation rate will likely inch up, on the back of stronger domestic demand.

Higher crude oil price, which is projected to fluctuate at between US$80-100/barrel

in 2010, compared with an average of US$62/barrel in 2009, and other commodity

prices will also contribute to a pick-up in consumer prices. In addition, the Government

plans to gradually remove some of the subsidies in order to reduce its financial

burden. As a whole, we believe inflation will likely trend up to 2.0% in 2010, from

+0.6% in 2009.

Normalisation Of Interest Rates Will Continue

While the headline inflation is likely to gradually trend up, we believe it will likely be

manageable. Nevertheless, as the economy has turned around in the 4Q of last year

and is expected to improve further in 2010, there is a need for the Central Bank

to bring interest rates back to a more neutral level to prevent financial imbalances

from building up. As a result, the Central Bank raised its overnight policy rate (OPR)

by 25 basis points to 2.25% on 4 March. We believe it will raise it again, albeit at

a measured pace, and the OPR w ill likely be raised by another 25 basis points

in July 2010 to 2.5% . Indeed, Bank Negara Malaysia Governor Tan Sri Dr Zeti

said on 16 March that the Central Bank may increase interest rates further to avert

asset bubbles and discourage risky investments by people seeking better returns,

even as inflation will likely remain modest this year. However, we believe it would

not raise interest rates at every policy meeting given expectation of an uneven

global economic recovery. This suggests that the OPR will likely stay at 2.50% untilthe end of the year. Given that this is a normalisation and not policy tightening per

se, we believe a mild and gradual increase in interest rates from an extremely low

level would unlikely affect consumer spending and business activities in a material

way.

Capi tal out f low, on the

other hand, will likely ease

further in 2010, in line with

an improvement in the

coun t ry s e conom i c

prospects

The ove ra l l ba l ance o f

payments is projected to

record a larger surplus in

2010

The r i ngg i t w i l l l i k e l y

settle at around RM3.20/

US$ by end-2010

Inflat ion rate wi l l l ikely

trend up to 2.0% in 2010,

on the back of strongerdomestic demand

We expect Bank Negara to

raise its OPR by another

25 bas is po ints in July

2010 to 2.5% and the OPR

w ill likely stay at this level

until the end of the year


10/76

STRATEGY PAPER10


Market Review

External Issues Dominated Market Movements

Despite higher volatility with declining volumes, the local bourse was relatively

resilient although it underperformed markets in Indonesia, Thailand and the Philippines

in the 1Q. The FBM KLCI benchmark was up by 3.1% year to date, with external

issues dominating market movements. Apart from key economic data releases,

particularly from the US and China, major events that led to the volatility of the

market include credit tightening in China, the proposal to restrict the scope of banks

activities in the US, debt worries in Europe as well as normalisation of policies in

some countries around the globe.

In general, the market got off to a good start in the new year as investors returned

to the market after the year-end holidays, with trading volume picking up. This was

partly attributed to asset reallocation exercises by institutional investors and the

sentiment was also buoyed by Wall Streets upbeat performance on the back of more

positive data supporting the strength of the global economic recovery. The FBM KLCI

benchmark trended up although there were occasional profit-taking activities caused

by Chinas tightening measures. From second liners and selected blue chips, investor

interest broadened to include more sectors as well as laggards and smaller capitalised

stocks. Investors on Wall Street were expecting more positive corporate earnings

in the results reporting season and the local benchmark crossed the psychological

important 1,300-point level on 19 January.

The FBM KLCI benchmark continued to trend up and hit a high of 1,308.36 on 21

January before succumbing to more significant profit-taking pressures (see Chart 3)

as US markets slumped. This was on account of US Presidents proposal to set limits

on risk-taking activities of the big banks, sending fears that banks potential earnings

and size will be severely affected by the proposed rulings. The Dow Jones Industrial

Average fell briefly to below the 10,000-point mark. This, coupled with the emergence

of debt problems in several highly indebted European nations, sent the global bourses

reeling and the FBM KLCI benchmark plunged to a low of 1,233.86 on 9 February

with falling volumes.

1,200

1,220

1,240

1,260

1,280

1,300

1,320

1,340

01/10/09

08/10/09

15/10/09

22/10/09

29/10/09

05/11/09

12/11/09

19/11/09

26/11/09

03/12/09

10/12/09

17/12/09

24/12/09

31/12/09

07/01/10

14/01/10

21/01/10

28/01/10

04/02/10

11/02/10

18/02/10

25/02/10

04/03/10

11/03/10

18/03/10

25/03/10

Chart 3FBM KLCI Movements From October 2009 To March 2010

Index

Visit by

Chinese

premier to

Msia10 Nov 09

Relisting of

Maxis

19 Nov 09

2010 Budget

speech by

the Prime

Minister.

23 Oct 09

1. Released

of BNM

Annual

Report.

24 Mar 10

2. Fitch cut

Portugals

credit rating

as debt

crisis

heightened.

25 Mar 10

BNM

Maintained

OPR at

2.0%.

28 Oct 09

BNM

Maintained

OPR at

2.0%.

24 Nov 09

Fitch

downgraded

Greeces

credit rating.

8 Dec 09

Standard &

Poor

downgraded

Greeces

credit

rating.

17 Dec 09

Greeces proposal of an

austerity programme to

cut its large fiscal deficit.

9 Feb 10

US Presidents

proposal to set

limit on risk-

taking activities of

the big banks.

22 Jan10

US Fed Reserve

hiking discount

rate by 25bps.

19 Feb 10

Release of

4QGDP by

BNM.

24 Feb 10

BNM raised

OPR by 25

bps.

4 Mar 10

Chinas

inflation rate

unexpectedly

jump to

2.7% yoy

for Feb.

11 Mar 10

Moodys

Investor

Services

warning

about the

potential risk

of UK losing

its top credit

rating.

15 Mar 10

Haitiquake

14 Jan 10

1.FOMC & BNM maintained

interest rates at 0.25% & 2.0%

respectively.26/27 Jan 10

2.Chinese banks tightened new

credit. 27 Jan 10

3. PM unveiled Government

Transformation Programme (GTP)

28 Jan 10

External issues dominated

marke t movement s

during the quarter under

review

The KLCI benchmark hit a

high of 1,308.36 on 21

January be fo re

succumb ing t o p ro f i t -

taking pressures due to

US proposal to restrict

banks activities and debt

problems in Europe

The new year got off to a

good start with broadening

market part ic ipat ion on

the back of mor e positive

economic data re leases

globally


11/76

11STRATEGY PAPER


The market, however, regained its upward trajectory after the lunar new year as

investors were cheered by a series of positive news flow, including positive economic

data in the US as well as optimism that Greeces debt problems will be resolved. The

sentiment, however, took a turn for the worse when the US Federal Reserve announced

its decision to hike the discount rate by 25 basis points to 0.75% -- a signal that it

is beginning to normalise monetary conditions for the economy. The correction in

the local market, however, was relatively mild and brief as local market sentiment

was subsequently buoyed by strong corporate earnings during the results reportingseason and the release of a stronger-than-expected economic growth of 4.5% yoy

for 4Q 2009 by the Central Bank.

Subsequently, more positive economic data from the US, particularly from the job

market, and the Greeces proposal of an austerity drive programme to cut its large

fiscal deficit brought back investor confidence globally. Locally, the Central Bank

raised its overnight policy rate by 25 basis points to 2.25% on 4 March to gradually

normalise the extremely loose monetary conditions and this was taken as a confirmation

of the strength of economic recovery. The FBM KLCI benchmark continued to trend

up and reached a new high of 1,328.22 on 10 March.

Profit-taking activities, however, emerged when China released a higher-than-expectedinflation rate of 2.7% yoy for February, sending fears to the local and regional

bourses over further policy tightening in China and its impact on asset prices and

economic growth. This was exacerbated by Moodys Investor Service warning about

the potential risk of UK losing its top credit rating. The FBM KLCI reversed its

uptrend and broke the psychological support of 1,300 on 15 March and continued to

languish in a sideway trading given the lack of fresh domestic leads, apart from the

proposed privatisation of Astro at RM4.30 per share. The FBM KLCI benchmark

eased to 1,293.65 on 22 March.

The market came back thereafter following Wall Street rallies amid signs of a

strengthening economic recovery. Despite the downgrade of Portugals credit rating

by Fitch Ratings and conflicting statements by the European leaders on the resolutionof the debt problems in Greece, the local market continued to trend up. Local

investors were cheered by the more upbeat official GDP growth forecast of 4.5-5.5%

for 2010 when the Central Bank released its 2009 Annual Report on 24 March.

Subsequently, investor confidence was boosted further by the joint bailout plan from

the European Union (EU) and the International Monetary Fund (IMF) for Greece as

well as the run-up to the Invest Malaysia Conference and the impending release of

a new economic model to chart the countrys economic direction over the medium

term. The FBM KLCI benchmark closed higher at 1,319.35 on 30 March.

Year-to-date, the FBM KLCI benchmark was up by 3.1%, although it has

underperformed markets in Indonesia (+10.4%), Thailand (+6.8%) and the Philippines

(+3.9%). It has, however, outperformed markets in China (-2.2% to -7.9%), HongKong (-5.0%), Taiwan (-4.3%), Singapore (-0.3%), South Korea (+0.3%), India

(+0.5%) and Vietnam (+1.7%) (see Table 4). The telecommunications & technology

sector surged by 34.3%, outperforming the market by a significant margin (see

Table 5). This was mainly on account of the surge in share prices of semiconductor

stocks on the back of a recovery in demand for their products, translating to sharp

rise in earnings. In addition, the mining (+11.1%), industrial products (+8.4%),

consumer (+6.3%), construction (+6.0%), and banking & finance (+5.9%) sectors

also outperformed the FBM KLCI benchmark in the 1Q. In contrast, the industrial

sector (-0.1%), plantation (+0.6%), property (+1.9%) and services & trading (+2.3%)

underperformed the index during the quarter under review. A list of top performers

and underperformers under our coverage is included in Table 6.

The marke t , however ,

rega i ned i t s upward

trajectory after the lunar

new year on positive news

flow, but sentiment took

a turn for the worse when

the Fed Reserve raised its

discount rate

Year- to-date , the

Malaysian market was up

by 3 .1% w i t h t he

t e l e commun i ca t i ons &

t echno l ogy sec t o r

outper fo rming the FBM

KLCI benchmark

significantly

Subsequent ly , pos i t i ve

economic data from the

US and loca l l y , and

Greeces proposa l to cut its

f i s ca l de f i c i t b rough t

conf idence back to the

market

The marke t , however ,came unde r se l l i ng

p res su res aga i n on

wor r i e s abou t Ch i na

tightening and risk of UK

losing its top credit rating

The market came back

thereafter following Wall

s t ree t ra l l i e s ,

announcement of a joint

bai lout p lan for Greece

and pos i t i ve news f l ow

domestically


12/76

STRATEGY PAPER12


Index 2009 2010 2009 2010

Country Indices 25 Mar 10 2Q 3Q 4Q 1Q* YTD

% Change

Malaysia FBM KLCI 1,312.5 23.2 11.8 5.9 3.1 +45.2 +3.1

Singapore Straits Times 2,888.4 37.2 14.5 8.4 -0.3 +64.5 -0.3

Thailand Bangkok SET 784.4 38.5 20.0 2.4 6.8 +63.2 +6.8

Philippines PSE Composite 3,171.1 22.7 14.9 9.0 3.9 +63.0 +3.9

Indonesia Jakarta Composite 2,799.1 41.3 21.7 2.7 10.4 +87.0 +10.4

Hong Kong Hang Seng 20,778.6 35.4 14.0 4.4 -5.0 +52.0 -5.0

Taiwan Taiwan Weighted 7,838.1 23.4 16.7 9.0 -4.3 +78.3 -4.3

Korea Korea Composite 1,688.4 15.2 20.4 0.6 0.3 +49.7 +0.3

China Shanghai Composite 3,019.2 24.7 -6.1 17.9 -7.9 +80.0 -7.9

China Shenzhen Composite 1,175.3 22.7 -1.4 26.6 -2.2 +117.1 -2.2

India Mumbai Sensex 30 17,558.9 49.3 18.2 2.0 0.5 +81.0 +0.5

Vietnam Vietnam SE 503.4 59.7 29.6 -14.8 1.7 +56.8 +1.7

U S Dow Jones 10,841.2 11.0 15.0 7.4 4.0 +18.8 +4.0U S S&P 500 1,165.7 15.2 15.0 5.5 4.5 +23.5 +4.5

U S Nasdaq 2,397.4 20.0 15.7 6.9 5.7 +43.9 +5.7

* As at 25 Mar 2010

Table 4FBM KLCI Performance Versus Other Regional Markets

Index 2009 2010 2009 2010

Bursa Msia by sector^ 25 Mar 10 2Q 3Q 4Q 1Q* YTD

% Change

FBM KLCI 1,312.5 23.2 11.8 5.9 3.1 +45.2 +3.1

FBM Emas 8,871.1 26.4 12.4 5.1 4.3 +48.6 +4.3

FBM 70 8,759.8 30.3 10.7 3.0 5.9 +52.0 +5.9

FBM 100 8,615.3 24.8 12.8 5.3 3.7 +48.0 +3.7

FBM Small Cap 11,208.0 43.7 8.6 3.1 10.3 +55.1 +10.3

FBM Fledgling 8,080.4 23.1 8.4 5.8 8.9 +36.9 +8.9

FBM Emas Syariah 8,851.3 23.7 11.1 2.9 4.0 +43.0 +4.0

FBM ACE 4,211.7 39.2 -0.7 5.7 -2.0 +29.0 -2.0

FBM Hijrah Syariah 9,380.7 20.1 10.5 3.6 0.7 +40.2 +0.7

Industrial 2,651.8 12.0 11.7 1.0 -0.1 +28.6 -0.1

Telecom & Technology 24.4 28.5 13.4 11.7 34.3 +32.5 +34.3

Construction 237.7 23.7 11.0 -2.8 6.0 +36.6 +6.0Consumer 395.8 13.1 12.7 2.5 6.3 +32.0 +6.3

Finance 11,708.7 30.8 16.2 11.1 5.9 +62.7 +5.9

Industrial Products 102.6 28.9 5.9 5.3 8.4 +41.6 +8.4

Plantation 6,402.7 20.0 9.3 8.0 0.6 +53.6 +0.6

Property 796.3 42.1 8.8 0.2 1.9 +51.6 +1.9

Services & Trading 164.7 22.3 10.5 2.1 2.3 +36.5 +2.3

Mining 324.2 25.2 15.1 -10.0 11.1 +26.3 +11.1

^ According to Bursa Malaysias classifications.

* As at 25 Mar 2010

Table 5Bursa Malaysia Performance By Sector


13/76

13STRATEGY PAPER


Top performers 25/ 3/10 31/ 12/09 % chg. Underperformers 25/ 3/10 31/ 12/ 09 % chg.

(RM/ share) (RM/ share) (RM/ share) (RM/ share)

Unisem 2.78 1.64 +69.5 Kurnia Asia 0.55 0.70 -20.9

Kossan Rubber 7.88 5.43 +45.1 H-Displays 0.06 0.07 -14.3Astro 4.24 3.00 +41.3 Genting Bhd 6.58 7.34 -10.4

Hock Seng Lee 1.48 1.06 +39.6 Puncak 2.74 3.03 -9.6

Media Chinese Intl 0.75 0.54 +39.3 Hunza Properties 1.23 1.32 -6.9

Faber 2.24 1.61 +39.1 KNM Group 0.73 0.77 -5.8

CSC Steel 1.76 1.30 +35.4 KLCC Property 3.26 3.44 -5.2

Top Glove 13.52 10.06 +34.4 TNB 7.97 8.40 -5.1

Jaya Tiasa 3.50 2.61 +34.1 Sino Hua-An 0.47 0.50 -5.1

Hartalega 8.21 6.22 +32.0 Petra Perdana 1.38 1.45 -4.8

Alianz Msia 5.20 4.06 +28.1 Sime Darby 8.61 8.97 -4.0

Axiata 3.82 3.05 +25.2 VS Industry 1.23 1.28 -3.9

M P I 6.68 5.35 +24.9 Quill Capital 1.04 1.08 -3.7

Hai -O 4.39 3.53 +24.5 IJM Land 2.27 2.35 -3.4

Media Prima 2.06 1.67 +23.4 Ann Joo 2.71 2.80 -3.2

Notion Vtec 3.30 2.72 +21.3 Furniweb 0.47 0.48 -3.1

Ta Ann 5.80 4.81 +20.6 MISC-F 7.93 8.18 -3.1

Sunway Hldgs. 1.52 1.27 +19.7 Hiap Teck 1.40 1.43 -2.1

Msia Airports Hldgs. 4.75 3.97 +19.6 YNH Property 1.50 1.53 -2.0

MRCB 1.51 1.27 +19.4 Freight 0.79 0.81 -1.9

Table 6Top Performers & Underperformers Of Stocks Under RHBRIs Coverage

(Year-To-Date)

Market Outlook

Sustainable, Albeit Uneven Global Economic Recovery

In our view, the prospects of a sustainable global economic recovery have

improved in recent months despite the emergence of sovereign debt worries of

late. As a whole, the global economy has emerged from recession since 4Q 2009

and global manufacturing and services activities have been trending up over the last

seven consecutive months. The labour market conditions have also improved with

the non-farm private sector in the US having recruited temporary workers consistently

since August 2009. The latest indication suggests that non-farm payroll employment

is set to increase in March, even though it is partly due to the hiring of workers to

conduct the 2010 Census. Similarly, the OECD composite leading indicators 12-month rate of change has recovered to positive growth for the last five consecutive

months, pointing to improving economic outlook in the OECD countries. Indeed,

economic growth is Asia ex-Japan has been gaining momentum and appears to be

self-sustaining at this stage. As asset prices have reached a favourable inflection

point and policymakers are in no hurry to implement exit strategies, a double dip

in the global economic recovery will unlikely occur, in our view. The global economic

recovery, however, will likely be uneven, as global growth could slow once stimulus

spending fizzles out given the still high unemployment situation in the developed

countries and weak recovery in private sector demand. Global growth will also be

tempered by countries facing debt problems cutting expenditure or raising taxes to

reduce their fiscal deficits. In other words, global economic growth could slow down

more significantly in the 2H before picking up again in 2011.

Good prospects o f

sus t a i nab l e g l oba l

economic recovery despite

a number of global issues

and concerns


14/76

STRATEGY PAPER14


Debt Worries And Deficit Reduction

Whilst the global economic recovery is gaining strength, new worries on the threat

of sovereign debt default have emerged, particularly in some of the European

countries, such as Portugal, Ireland, Italy, Greece and Spain (PIIGS). More and

more countries that are faced with high and rising fiscal deficits are forced to cut

expenditure or raise tax revenue to reduce their fiscal deficits to a more manageable

level. Investors worried that these measures could jeopardise the nascent economicrecovery in these countries. These, however, are not the only cause for concern.

Policy changes around the world have also spooked investors. Various countries in

the emerging world have begun to experience assets price-reflation of late and have

been tightening credit conditions to prevent asset bubbles from building up. Notably,

China has taken a number of measures to rein in its lending binge, while Reserve

Bank of India has raised reserve requirements of banks and Brazil is phasing out

its fiscal stimulus. With the exception of Japan, reserve banks of the developed

nations are gradually unwinding the emergency liquidity facilities and quantitative

easing. All these measures will temper the pace of economic recovery in these

countries and have created fears of pushing the global economy back into a recession.

Nevertheless, we believe a global sovereign credit problem (see Table 7 forcountries ranked by sustainability of debt position) will unlikely unfold given that

Greece has taken steps to cut its budget expenditure by 4.8bn euros with the aim

of reducing its fiscal deficit to 8.7% of GDP in 2010, from a deficit of 12.7% of GDP

in 2009. More importantly, the EU and the IMF had announced a joint bailout plan

for Greece, although it comes with strict conditions and makes no money available

at this stage. Under the plan, each EU country would provide non-subsidised loans

to Greece based on its share in the European Central Bank (ECB), and it will make

Table 7From Shakiest To Safest

Countries ranked* by sustainability of debt position

% of GDP, 2010 forecast

Primary budget GDP growth Sovereign

balance, cyclically Net less cost of debt, years

adjusted1 debt1 finance #, % to maturity^

Greece -4.6 94.6 -3.2 7.7

Ireland -7.0 38.0 -5.1 6.8

Britain -6.7 59.0 -1.5 13.7

Japan -5.9 104.6 0.1 5.4

Portugal -2.7 62.6 -2.3 6.5

Spain -4.3 41.6 -3.0 6.7

France -3.8 60.7 -0.7 6.9

United States -7.0 65.2 1.4 4.8

Poland -5.3 32.4 -0.7 5.2Italy 2.2 100.8 -1.0 7.2

Hungary 4.2 62.1 -3.5 3.3

Belgium 1.3 85.4 -0.6 5.6

Netherlands -1.4 36.5 -0.6 5.4

Austria -0.9 42.9 -0.6 7.0

Germany -1.2 54.7 -0.5 5.8

Czech Republic -1.9 5.3 0.0 6.4

Norway -7.8 -143.6 2.4 4.9

Canada -2.7 32.6 2.0 5.2

Denmark -1.4 1.6 0.1 7.9

Australia -0.7 -1.3 0.2 5.0

Switzerland 0.4 11.0 0.5 6.7

Finland -0.9 -46.4 0.9 4.3

Sweden -0.3 -13.1 1.5 6.4

* Based on the sum of the countries rank for the first three debt measures.1 General government.

# Forecast average nominal GDP growth for 2010-11 less latest yield on government bonds of average maturity.

^ Weighted average

Source: Bloomberg, EIU, OECD, The Economist.

New w orries on the threat

of sovereign default have

emerged and po l i c y

changes around the globe

have a l so spooked

investors

A global sovereign creditp rob lem, however, w i l l

un l i ke l y un fo l d and

European debt probelms

are l i k e l y t o be

manageable


15/76

15STRATEGY PAPER


up more than half of the loans and the IMF will provide the rest, if necessary. This

bailout plan could also be used for other EU countries, such as Portugal and Span

that are facing debt problems. In addition, the ECB has extended its current

emergency collateral rules to its member countries beyond 2010, which was originally

scheduled to be withdrawn at the end of 2010, softening its stance as Greece

struggles to cut its budget deficit. Under such circumstances, we believe any further

fallout of other European Union member countries are likely to be addressed by the

EU governments and the IMF as well. Consequently, the European debt problemswill unlikely snowball into a much bigger issue that will jeopardise the global economic

recovery. Similarly, we believe the normalisation/tightening of policies by central

banks around the globe would likely be gradual and will unlikely cause the global

economy to fall into a double-dip recession.

Nevertheless, the fiscal deficit reduction either via cutting expenditure or raising

taxes would imply uneven economic recovery in these countries that would have

implications for the rest of the world. This, coupled with occasional negative news

flow and debt worries in other part of the world, implies that world financial markets

would likely be volatile for the greater part of the year, in our view.

Local Economic Recovery Strengthening

Locally, the Malaysian economy has turned around to register a stronger-than-

expected growth of 4.5% yoy in 4Q 2009, from -1.2% in the 3Q. Apart from the

Governments stimulus expenditure, consumer spending continued to strengthen on

the back of improving employment outlook and rising confidence. With improving

prospects, the business sector, which had previously cut back on spending, has

begun to invest and expand their operations. The overall growth was, however, lifted

by the recovery in external demand for the countrys exports, which have turned

around to record a positive growth of 7.3% in 4Q 2009 (see Chart 4), from -13.4%

in the 3Q.

Moving forward, the global electronic upcycle and sustained recovery in external

demand for the countrys exports will likely bolster domestic private sector demand

and strengthen the economic recovery. These will more than offset the impact from

the planned reduction in government expenditure to reduce its budget deficit to 5.6%

of GDP in 2010, from 7.0% of GDP in 2009. Overall, we project the Malaysian

economy to bounce back and expand by 4.5% in 2010, from -1.7% in 2009.

Robust Corporate Earnings Momentum

Reflecting the improvement in the economy, the recovery in corporate earnings is

also gaining momentum (see Chart 5). Indeed, corporate earnings have consistently

surprised on the upside over the last three results reporting seasons, with more

companies reporting better margins from improving demand, better product mix and

Chart 4Economy Turning Up Strongly In 4Q2009

% yoy

- 2 0

- 1 5

- 1 0

- 5

0

5

1 0

1 5

2 0

0 5 0 6 0 7 0 8 0 9

G D P

E x p o r ts

P r iv a te C o n s u m p ti o n

F ix e d c a p it a l in v e s tm e n t

Expec t t he econom i c

recovery to gain pace and

bounce back to +4.5% in

2010

The Malays ian economy

has expe r i enced a

s t ronger- than-expected

recovery in 4Q 2009

Nevertheless, the uneven

econom i c recove ry i n

these countries and the

negat ive news f low wi l l

sti l l cause markets to be

volatile


16/76

STRATEGY PAPER16


lower operating expenses on the back of the implementation of cost-cutting measures.

This view is reinforced by our company visits and corporate briefings attended by

analysts where the corporate representatives are turning more optimistic on their

business prospects. Many of the corporates are beginning to expand their business

operations and are guiding for improving outlook in the quarters ahead. We expect

net EPS for the FBM KLCI stocks under our coverage to bounce back from a

contraction of 14.2% in 2009 to a double-digit growth of 15.3% in 2010 , and

we believe, there is still room for upside earnings surprises as the economic recoverygains momentum. The recovery in earnings thus far has been relatively broad base

and we project net EPS growth for the FBM KLCI stocks under our universe to be

sustained at +15.3% in 2011.

But Market Valuations Are Back To Normal Levels

Whilst both the economy and corporate earnings are trending up and on track to

recover in 2010, much of the positive developments have already been factored intothe market, in our view. Based on our current earnings projection, the FBM KLCI

is already trading at 15.9x 2010 earnings and 2.2x price/book (see Table 8), which

are slightly ahead of its mid-cycle average since the Asian financial crisis. Though

still not stretched, valuations are by no means cheap and are back to normal levels.

Chart 5Corporate Earnings Recovery Gain ing Momentum

%

Note: Normalised EPS for RHBRI covered stocks in FBM KLCI.

Exclude Astro

- 6 0

- 4 0

- 2 0

0

2 0

4 0

6 0

1QCY06

2QCY06

3QCY06

4QCY06

1QCY07

2QCY07

3QCY07

4QCY07

1QCY08

2QCY08

3QCY08

4QCY08

1QCY09

2QCY09

3QCY09

4QCY09

q o q y o y

FBM KLCI RHBRI s Basket

COMPOSITE INDEX @1,312.48 2008a 2009a 2010f 2011f 2008a 2009a 2010f 2011f

25/3/2010

EBITDA Growth (%) 3.4 -5.7 19.5 12.1 4.6 -1.6 17.8 11.8

Pre-Tax Earnings Growth (%) -7.9 -9.1 30.8 15.5 -6.2 -4.1 27.9 15.4

Normalised Earnings Growth (% )* 1.0 -9.4 19.8 15.3 -0.4 -6.4 21.5 15.2

Normalised EPS Growth (% )* -1.6 -14.2 15.3 15.3 -3.5 -10.0 17.0 15.2

Prospective PER (x)* 16.3 18.2 15.9 13.8 16.5 17.5 15.1 13.1

Price/EBITDA (x) 8.7 9.4 7.9 7.0 8.8 8.6 7.5 6.7

Price/Book (x) 2.4 2.3 2.2 2.1 2.4 2.0 2.0 1.8

Price/NTA (x) 2.8 2.9 2.6 2.4 2.8 2.3 1.3 1.2

Net Interest Cover (x) 6.5 5.9 6.0 7.6 6.2 6.9 7.0 7.8

Net Gearing (%) 71.3 61.3 52.5 49.2 64.1 53.9 48.5 46.7

EV/EBITDA (x) 6.9 7.6 6.6 5.7 7.1 7.6 6.6 5.8

ROE (%) 15.3 12.7 14.1 15.0 13.7 11.9 13.4 14.1

* For FBM KLCI, earnings are adjusted to exclude Astro from 2009-10

Table 8

Earnings Outlook And Valuations

Marke t va l ua t i ons ,

however , a re back t o

normal levels

Normalised net EPS for the

FBM KLCI s t o cks i s

p ro j ec t ed t o rebound

sharply to +15.3% in 2010


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17STRATEGY PAPER


Malaysia Singapore Thailand Philippines Indonesia Hong Kong Taiwan KoreaFactSet Asian Consensus Trends report dated 24 Feb ruary 2010

EPS growth(% )

2009a 2.4 -5.4 32.6 27.2 53.7 11.3 40.7 43.92010f 25.8 13.2 13.6 3.9 15.2 22.5 59.6 50.12011f 12.2 10.3 15.4 8.1 22.4 16.8 18.4 8.9

PER (x)2009a 18.2 16.3 11.8 13.0 16.0 16.1 22.5 14.22010f 14.1 14.2 10.7 12.6 13.7 13.3 14.1 9.620011f 12.6 12.9 9.3 11.7 11.2 11.4 11.9 8.8

IBES Consensus dated 18 March 2010

EPS growth(% )2009a -19.2 -8.7 28.8 17.8 9.2 20.1 79.9 59.32010f 27.2 21.0 13.4 17.9 21.2 14.2 84.1 40.42011f 14.7 11.9 15.9 12.2 20.2 16.4 17.1 13.4

PER (x)2009a 18.2 16.8 12.8 15.1 16.8 16.3 27.4 14.02010f 13.9 13.8 11.3 12.6 13.8 14.3 14.9 9.8

2011f 12.1 12.4 9.8 11.2 11.8 12.3 12.6 8.7

Performance (%)2008 (yoy) -39.3 -49.2 -47.6 -48.3 -50.6 -48.3 -46.0 -40.72009(yoy) +45.2 +64.5 +63.2 +63.0 +87.0 +52.0 +78.3 +49.72010 (ytd)* +3.1 -0.3 +6.8 +3.9 +10.4 -5.0 -4.3 +0.3

* as at 25 Mar 2010 closing

Table 9Regional Compar isons

Based on the latest FactSet Asian and IBES consensus numbers, the local market is

trading at comparable PER valuation vis-a-vis the Singapore market, although it is

still trading at a premium relative to most of the other regional peers (see Table 9).

This, in our view, is a reflection of high domestic liquidity and strong participation

by the Government-linked funds, and will unlikely change in the foreseeable future.

It is, however, still a very under-owned market by foreign investors and

non-strategic foreign equity ownership of the Malaysian market is estimated at below

21% currently (20.4% as at end-2009), a sharp drop from a recent high of 27.5%at end-April 2007. In terms of market turnover, foreign participation in the market

has fallen from an average of 36% over the past five years to about 29% currently.

This implies limited downside risk to the market and potentially, the market could be

re-rated if foreign investors turn positive on the countrys economic reforms.

A New Economic Model And Reforms To Drive The Market Over The

Longer Term

Whilst the market lacks strong catalysts to entice foreign institutional interest in the

near term, the Malaysian Government has embarked on a series of reforms to

improve the economys prospects over the longer term. Apart from the 1 Malaysiaconcept, a Government Transformation Programme (GTP) has been launched in

January 2010 to improve its delivery system and reduce the cost of doing business

in the country. Under the programme, national and ministerial key result areas are

spelt out to ensure that the objectives of reducing crime rate, corruption and poverty

as well as improving education standards, rural infrastructure and urban transportation

are met over time.

Meanwhile, the Government has taken this transformation a step further by announcing

a new approach of policy towards affirmative action which are market friendly, merit

based more transparent and needs based. The details of this affirmative action are

contained in the new economic model (NEM), unveiled by the Prime Minister on 30

March during the Invest Malaysia Conference. The NEM aims to move the countrytowards a high-income economy through innovation, knowledge and R&D as well as

improve efficiency and productivity. It essentially shifts the ethnic focus of the

previous National Economic Policy to one that focuses on the bottom 40% of households

by income levels. The Prime Minister also highlighted six national economic activities

Meanwhile, the Malaysian

Gove rnment has

embarked on a series of

reforms to improve the

coun t ry s e conom i c

prospects

It is, how ever, stil l a very

under-owned market by

foreign investors, implying

potential market re-rating

if foreign investors turn

positive on the countrys

economic reforms

A new approach of policy

towards affirmative action

v i a t he new econom i c

mode l has been

announced dur i ng t he

Inves t Ma l ays i a

Conference


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STRATEGY PAPER18


to be the engines of growth, including oil & gas, electronics, electrical, tourism,

agriculture and financial services. We believe resources are a key focus in moving

up the value chain and as it stands, larger planters like IOI, KLK and Sime Darby,

and major timber companies like Jaya Tiasa, Ta Ann, WTK and Lingui are already

involved in downstream activities.

Whilst the NEM is supposed to contain further liberalisation measures and a gradual

phasing out of subsidies to bring about a more competitive economy, it still lacksdetails in terms of the actual policy changes at this stage. More detailed plans are

expected to be launched in June 2010 (together with the release of the Tenth

Malaysia Plan (10 MP), 2011-15) after a consultative period with the public. Assuming

the Government follows through with plans to address and possibly end or shrink the

subsidy system, we believe this will be positive for Tenaga Nasional (although any

hike in electricity tariffs will likely be announced separately). The Prime Minister

mentioned Pos Malaysia with regards to a wage increase and Khazanah Nasionals

potential sale of its 32.2% shareholding to a new investor. We believe this can only

happen if postal rates are raised (and we note management has proposed a plan

to raise rate as a means of paying higher salaries).

Whilst the new reforms could bring back investor interest to the local bourse, webelieve the tangible impact can only be felt over the longer term. This is because

certain structural issues will still need to be addressed including : (i) Improvement

in education standards; (ii) Balancing higher incomes with the likelihood of higher

costs; (iii) Shortage of skilled manpower; and (iv) Local players may not be ready

for greater foreign competition, leading to a risk of policy flip flop later. The reality

is that the big listed companies are primarily brick and mortar businesses and cannot

quickly change direction. As a result, we do not expect any quick wins here. At

the end, consistent implementation will still be crucial.

Nevertheless, as the NEM will likely be the over-arching theme for the 10MP, the

momentum of positive news flow may continue to build up, particularly for the

construction sector with regards to the implementation of more infrastructure projectsas the Government embarks on a new set of privatisation initiatives to implement

its development programmes. The overall sentiment, however, could still be capped

by the need to reduce the countrys fiscal deficit further and the announced plan to

cut the Federal Governments gross development expenditure to RM180bn in the

10MP, from RM230bn under the Ninth Malaysia Plan. The difference, however, is to

be filled by private finance initiative projects as the Government embarks on a

scheme to unlock its asset values, including the development of prime land

belonging to the Federal Government, as well as the l isting of Ministry Of

Finance Incs companies. During the Invest Malaysia Conference, the Prime

Minister highlighted that Petronas had identified two subsidiaries for listing but did not

elaborate. In our 19 January Market Update, we highlighted the possibility of

Petronas oil & gas trading company (Mitco) and the petrochemical plants beinglisted. Whilst the Government aims to remove the safety net for the Government-

linked companies (GLCs) under the NEM, we believe this could be difficult to implement

for all given the social impact. More importantly, GLCs will collaborate with private

companies, particularly to drive regional and global expansions. These initiatives,

coupled with further restructuring of the GLCs and the reduction of holdings by

the Government-linked investment companies (GLICs), could gradually build

momentum and attract new focus into the Malaysian market, in our view.

The other domestic theme that is beginning to emerge is the Sarawak state

elections , which are due by May 2011 but widely expected to be held this year. As

political parties have recently focused effort on strengthening and expanding their

support in the state, expectations are building up and this could gradually attract

more focus into the Sarawak-based companies, in our view. Already, companies

such as HSL, Naim Holdings, CMSB and Weida have outperformed the FBM KLCI year

to date and, in our view, will likely continue to be supported by positive news flow

in the run up to the state elections. Among the Sarawak stocks that we cover, we

Deve l opment o f p r ime

l and be l ong i ng t o t he

Government, the listing of

MOF Incs companies and

GLC res t ruc t u r i ng w i l l

l i k e l y bu i l d momentum

and attract new focus into

the Malaysian market

In ou r v i ew , t heimplementation of a new

econom i c mode l cou l d

revive foreign interest on

the local market, although

we believe tangible impact

can only be felt over the

longer term

Whilst it sti l l lacks details

in terms of actual policychanges a t t h i s s t age ,

more detai led plans are

expected to be launched

together with the release

of the 10MP in June

Sarawak state e lect ions

c o u l d be ano t he r

emerg i ng domes t i c

investment theme


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19STRATEGY PAPER


believe HSL will likely be a prime beneficiary of more construction projects, although

there would be some focus on the states natural resources as well. These include

the plantations, timber and oil & gas sectors. The plantation companies stand to

benefit if the state government opens up more land for oil palm plantations. Whilst

the timber players are less tied to domestic projects, they could potentially be

involved in other downstream activities. Longer term, we expect the Sarawak

Corridor of Renewable Energy (SCORE) to build momentum given the significant

potential for cheap energy which is being used to attract energy-intensive industries.This will have knock-on effects on the construction, building materials and housing

sectors.

Whilst greater corporate restructuring, and mergers and acquisitions (M&As) could be

in the pipeline to unlock shareholder values for investors, it is generally difficult to

identify them until closer to the event date.

Normalising Interest Rates Positive For Banks

Meanwhile, the Central Bank has begun to normalise monetary conditions by raising

its overnight policy rate by 25 basis points to 2.25% on 4 March 2010. This came

about when economic recovery turned up to be stronger than expected in 4Q 2009and the Central Bank viewed the low interest rate as no longer appropriate and sees

a need to prevent financial imbalances from building up as money searches for

returns to beat inflation that is creeping up. We expect the Central Bank to raise

its policy rate by another 25 basis points in July and the countrys overnight policy

rate will likely stay at 2.5% until the end of the year. Apart from the positive impact

on confidence on the sustainability of the economic recovery, it tends to have a

positive impact on the net interest margins of banks as assets are being re-priced

faster than liabilities. As the banking sector carries heavier weight in the FBM KLCI

benchmark, better performance of the banking stocks tends to lift sentiment on the

overall market.

Stronger Ringgit Also Supportive Of Market

The ringgit has been on an appreciating trend vis-a-vis the US dollar and the regional

currencies since the Central Bank raised its overnight policy rate on 4 March. We

expect this trend to persist as regional trade rebounds and Asia ex-Japan experiences

a stronger economic recovery and a faster pace of policy normalisation. Given debt

worries and sovereign credit issues in the developed countries, the ringgit has

overshot RM3.30/US$ temporarily as investors adjust to changes in policy and the

pace of economic recovery. Nevertheless, we expect the ringgit to settle at around

RM3.30/US$ at the end of the year before appreciating to RM3.20 by end-2011.

Although the appreciation of the currency is envisaged to be gradual, it tends to be

supportive of foreign capital flows into the local capital markets and would have a

mild positive impact on local equities as well.

In terms of companies, beneficiaries of a stronger ringgit include those that buy raw

materials/components from abroad (priced in foreign currency) and sell their products

locally (denominated in ringgit). These would include food and beverage as well as

motor companies. A clear beneficiary of a stronger ringgit, for instance, is Amway.

In addition, local companies with a large amount of foreign debt such as Tenaga

Nasional and Telekom Malaysia will also benefit from lower debt servicing. In

contrast, exporters such as semiconductor and other manufacturing companies could

be impacted negatively, although glove manufacturers are able to pass on the impact

to end-customers with a slight time lag. In addition, a stronger ringgit would also

impact overseas profits for companies that have ventured abroad such as Tanjong

and YTL Power.

Meanwhhile, Bank Negara

is set to raise its overnight

policy rate by another 25

bps in July and this will be

posit ive for the banking

sector, albeit temporary

Also expect more M&As in

the pipeline

A gradual appreciation of

the ringgit vis-a-vis the US

do l l a r w i l l a l s o be

supportive of the market


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STRATEGY PAPER20


External Events And Global Policy Changes Signal Market Volatility

Meanwhile, external events such as negative news flow from the heavily indebted

developed countries would cause the market to be volatile. As more countries in

the heavily indebted countries in the developed world are forced to reduce expenditure

or raise revenue via higher taxes to trim fiscal deficit, fears of a double-dip

recession will surface.

The gradual normalisation of interest rates domestically has been taken positively

thus far as it reconfirms the strength of the economic recovery. However, we believe

the same cannot be said when more and more countries begin to normalise monetary

conditions as policymakers could before long begin to tighten policies more

significantly to engineer for a more sustainable economic recovery. When this situation

emerges, we expect the global financial markets to experience a period of greater

volatility.

The key is the US, which has started to normalise monetary conditions by raising

Federal Reserves discount rate, the rate it charges banks for emergency loans, by

25 basis points to 0.75% with effect from 19 February. In a prepared testimony for

the Houses Financial Services Committee, the Fed chief said the interest rate paidto banks on excess reserves held at central bank may for a time replace the Federal

funds rate as the main operating target for policy. Raising the rate would give banks

an incentive to park more funds at the Fed instead of lending them out to companies

or households. As part of the Feds plans to wind down its emergency liquidity

measures, Mr. Bernake is also looking at using term deposits and reverse repurchase

agreements (repos) to siphon off excess liquidity from the system. In this way, the

Fed would be able to restrain an economy that risks overheating and sparking

inflation in the future. The gradual scaling back of unconventional monetary policy

stimulus, in our view, will likely curb investors appetite for risk even if the Fed

leaves the Federal funds rate on hold for an extended period.

Given external developments and as valuations of the equity market are no longercheap and are back to normal levels, we expect greater volatilities in stock

prices in the coming months. Our year-end FBM KLCI target, however,

remains unchanged at 1,400 or 15x 2011 earnings. We believe this target is

achievable and there could even be a slight upside for the market to trade up to

1,450 should the recovery in corporate earnings turn up to be stronger than expected.

We expect the market to come back and trade up to our target level in the latter

part of the year when there is more certainty on the strength of the global economic

recovery. This implies a potential upside of about 10% from end-2009 level and

about 6% from the current level, which is consistent with the historical performance

where returns are always lower in the second year after hitting a cyclical low.

Market Strategy

Accumulate On Weakness And Ride The Volatility

In our view, the current market volatility/correction is an opportunity to accumulate

quality stocks for longer-term performance given our view that a global sovereign

credit problem will unlikely unfold and the global economic recovery is more sustainable

than feared. Nevertheless, investors would have to factor in the anticipated

global policy changes in the months ahead , rebalance their portfolios and

prepare for greater market volatility for the greater part of the year.

In our view, stock picking is key. The challenge is to look for stocks that could

generate capital upside from earnings growth as well as have attractive divided yield

to outperform the market. The focus would include recovery leaders that have

a strong leverage to the economic recovery and quality cyclicals for an

early reflation trade. These would include, amongst others, the industry leaders in

the banking space, the bigger semiconductor companies, Tenaga Nasional and Media

Meanwh i l e , ex t e rna l

events are likely to cause

the market to be volatile

Gradual normalisation of

policies around the globe

would signal tightening in

the not too distant future

Stock picking is key and

we like recovery leaders

and quality cyclicals

Need t o f ac t o r i n t he

anticipated global pol icy

changes in the months

ahead

Env i sage a vo lat i l e

upt rend fo r the market

with end-2010 FBM KLCI

t a rge t rema in i ng

unchanged at 1,400

The key is the US where

the gradaul scaling back of

unconventional monetary

policy stimulus will l ikely

curb investors appet i te

for risk


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21STRATEGY PAPER


Table 10Top Picks

Fair Mkt EPS EPS GWTH PER P/ BV P/ CF GDY

FYE Price Value Cap (sen) (%) (x) (x) (x) (%)

25/3/2010 (RM/ s) (RM/ s) (RM Mil) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10

Maybank Jun 7.39 8.96 52,304 51.3 60.7 35.7 18.1 14.4 12.2 1.9 n.a. 3.9

CIMB Dec 13.96 16.24 49,303 95.5 112.6 20.2 17.9 14.6 12.4 2.3 n.a. 1.3

Maxis Dec 5.38 6.20 40,350 33.2 36.2 6.6 9.1 16.2 14.9 4.0 10.5 6.2

Tenaga Aug 7.97 9.50 34,538 64.9 73.6 30.4 13.4 12.3 10.8 1.2 4.2 3.3

Genting Dec 6.58 8.90 24,378 45.8 56.1 38.9 22.5 14.4 11.7 1.5 5.8 1.4

KLK Sep 16.34 18.40 17,443 87.5 123.3 23.7 40.8 18.7 13.3 2.9 15.0 2.8

Top Glove Aug 13.52 15.50 4,107 89.0 96.2 55.3 8.1 15.2 14.1 4.0 12.4 3.4

IJM Land Mar 2.27 3.19 2,504 18.4 34.4 88.5 87.2 12.3 6.6 1.4 4.6 0.9

Media Prima Dec 2.06 2.23 1,947 14.8 15.8 +>100 6.7 13.9 13.0 2.1 6.7 4.9

Wah Seong Dec 2.56 3.09 1,788 19.3 20.8 46.1 8.0 13.3 12.3 2.5 4.8 3.0

Sunway City Dec 3.31 5.33 1,556 34.8 38.8 9.8 11.6 9.5 8.5 0.7 6.1 2.4

Unisem Dec 2.78 3.39 1,442 20.5 31.0 77.6 51.5 13.6 9.0 1.7 5.1 1.8Kossan Dec 7.88 10.74 1,260 82.6 103.0 10.3 24.7 9.5 7.6 2.6 8.3 1.3

Evergreen Dec 1.65 2.35 846 21.3 23.3 26.1 9.4 7.7 7.1 1.1 10.9 3.0

Faber Dec 2.24 3.30 813 26.5 24.2 16.4 -8.8 8.4 9.3 1.7 5.3 3.1

Notion Vtec Sep 3.30 4.59 510 33.4 45.9 30.4 37.5 9.9 7.2 2.5 7.0 2.0

Daibochi Dec 3.64 4.40 276 36.7 39.9 22.4 8.8 9.9 9.1 2.0 8.5 6.5

Prima, in our view. As valuations are back to normal levels, we believe dividend

will also play a more significant role in determining share price performance this

year. The key is to avoid companies

Documents

Market Outlook & Strategy 2Q2010 : Volatile Market Uptrend Amid Policy Normalisation - 31/01/2010