FUND managers believe that the stock market is poised for further upside next year as cheap money continues to flood the market supported by real economic growth. Granted, the ride will not be an entirely smooth one.
While liquidity is a good thing, too much of it will lead to inflation and asset bubbles .
The market may also experience bouts of volatility caused by the ongoing financial mess in Europe as markets and economies are closely linked.
Here are the views of some of the experts on what we can expect from the local stock market in 2011.
Danny Wong
Chief executive officer
Areca Capital
Outlook: Barring unforeseen circumstances such as geopolitical risks, contagion effects of sovereign indebtness and a double-dip recession in the Western economies, I would like to think that the economies will continue to improve, particularly in this part of the World, and thus the stocks should reflect the real growth in earnings.
With better earnings, huge global liquidity and improved risk appetite, most stock markets should achieve an impressive upside and it will not be surprising if we are to experience a potential bull run.
Concerns/challenges: The major risks are a possible double dip recession caused by deteriorating consumption spending due to high unemployment rate in the West, worsening global imbalance with widen savings/deficit gaps continuing to affect the currencies, carry trades which might increase financial risk, sovereign bankruptcy and over-reacting by major economies (e.g. US' excessive quantitative easing or China over-tightening of its policies).
Stock/Sector picks: We continue to invest in large caps blue-chips such as CIMB, Genting, Maybank for their strong management team, cashflow and exposure to regional and international business operations. We also like those sectors which can leverage on a global economic recovery within the next 2 years and benefit from domestic economic growth plan such as the Economic Transformation Programme (ETP) and specific stocks for merger and acquisition (M&A) activities.
Gan Eng Peng,
Head of equities
HwangDBS Investment Management
Outlook: For the last 2 years, economic and therefore market outlook fluctuated almost every six months from double dip to European crisis to liquidity rallies to inflation.
We expect 2011 to continue to confound investor expectations. As of now, we are bullish for 2011.
The conditions that drove a strong 2010 is going to continue into early 2011. These include ample money in the system, a continued belief in a genuine global economic recovery, still palatable valuations and heightened M&A activities.
The government-engineered private investment cycle via its ETP is gathering momentum. The amount of positive news that bought us to a new high in 2010 should continue into early 2011.
Challenges/concerns: Thailand is going for a general election in the first half of 2011. Malaysia is also slated for one soon. Investors might look at this as an opportunity to lock in profits as elections inevitably increases uncertainty of business and policy continuity.
There is a lot of foreign hot money in our market due to the cheapness of money. Hence, the currency is strong, our government debt pricing is high and the stock market is elevated. If the cost of borrowing these monies were to rise due to inflation, monetary tightening or better returns' alternative elsewhere there could be a big exodus out of this region. Given the low liquidity of our markets, its impact could be severe.
Stock/sector picks: With economic recovery, corporate spending tends to pick up as companies fret less about economics and worry more about sales and market share.
Hence, advertising expenditure naturally picks up as the economy picks up steam.
One of our top stock picks for 2011 is Media Prima, a media investment group due to its dominant position in free-to-view TV broadcast, Malay medium newspapers and outdoor advertising.
Again, on the back of global economic recovery, spending on information technology (IT) will increase and investors should be exposed to IT stocks like Unisem .
In particular, Unisem has very a strong pipeline of Chinese business with their new plant in China.
Thomas Yong
Chief executive officer
Fortress Capital Asset Management
Outlook: Despite holding the view of slower economic growth in 2011, we think the stock market should continue to do well, on the back of strong liquidity arising from quantitative easing in the developed economies.
In addition, the market's valuations are not demanding, trading at 15 times 2011 earnings.
Apart from external factors, we expect the Government's ETP to progress further, providing some positive news flow to the market and lifting sentiments.
Concerns/challenges: Having said that, we think that market should experience some degree of volatility, directed by swings in foreign flows, in reaction to news flow such as inflation and fear of potential capital controls by some of these emerging Asian economies to curb hot money flows.
Stock/sector picks: As a proxy to the economy, we think that the banking sector should do well. Apart from improving asset quality, loans growth is also expected to be healthy, supported by high savings and resilient consumer sentiment. Furthermore, government infrastructure projects should pick up, providing support to loans growth.
In year 2011, there should be further hikes in the Overnight Policy Rate, which should help to raise net interest margins of banks.
We also like the plantations sector as a proxy to rising commodities prices amid a weak US dollar.
Choo Swee Kee
Chief investment officer
TA Investment Management
Outlook: We are bullish for 2011, especially for the first half of the year. The investment markets have held up well despite the still uncertain economic outlook in the US and Europe. Our view is simply that the US will show sustained growth albeit with lower expectations and the European crisis will be resolved with funding. Also, a slower-growing China is desirable to maintain sustainable growth.
The global economy has just recovered from a recession and we are still at the early stage of the cycle. We believe that ample liquidity will be one of the key drivers in the market. With corporates showing much improved profits, valuations are still not excessive and appear to be keeping pace with the rise in the equity markets.
It is difficult to gauge how high this liquidity can push the market and we caution that volatility would likely increase.
Concerns/challenges: Inflation and asset bubbles are our two main concerns for 2011. Earlier, we mentioned that excess liquidity will continue to be a key driving force in the market. One of the side effects of excess liquidity is inflation and asset bubbles as money becomes cheap and every investor with money seeks some returns on these excess liquidity. However, we are comforted by the fact that the current economic and earnings recovery are providing the base to support a market rally.
Stock/sector pick: Supermax is reputed to be the second largest glove manufacturer in the world with an estimated 13% market share. Through Supermax, investors are buying into global growth and will have access to much more exciting emerging markets in Latin America and Asia.
Global demand and consumption of gloves are non-cyclical and has remained strong. It has been growing consistently at between 8% to 10% per annum for the past ten years and we expect this to be sustained.
Sime Darby will benefit from potential earnings upside from the continuing run-up in CPO prices. As a result of inflation and increased demand, CPO prices should remain high in the short-term. In addition, its motor division is doing well especially in China and Australia.
Sentiment towards the stock should also improved as investors warm up to the new group corporate structure, effective Jan 1, 2011.
Media Prima is the best proxy to ride on the country's steady advertising expenditure growth, given an integrated platform with continued dominance in TV, radio, outdoor, new media and steady performances from print platforms.
Campbell Tupling
Chief executive officer,
CIMB-Principal Asset Management
Outlook: For Bursa Malaysia, conditions seem right for continued market appreciation. The 2011 price earnings ratios (PER) for Bursa Malaysia of 14.8 times, is a premium to Asia Pacific ex-Japan's PER of 12.5 times. However this has always been the case because of the presence of large government institutions like the Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB).
We tend to focus more on the PER relative to its long-term average, which is at 15 times. While the market looks fair, we believe that the momentum of earnings upgrades will bring valuations lower next year. Recently, the momentum in earnings upgrades for Bursa Malaysia has been one of the highest in the Asia Pacific ex-Japan
Concerns/challenges: Our main concerns are inflation and the rising interest rates in Asia ex-Japan, as well as volatility caused by the sovereign debt crisis in Europe.
We believe both Portugal and Spain will be bailed out if needed, and that the Emergency Fund of the European Central Bank totalling 925 billion euros will be sufficient for that purpose.
Stock/sector picks: The implementation of the ETP will lead to the roll out of large projects that will benefit the construction and oil and gas sectors all of which could lead to a revival in corporate loans growth.
Meanwhile, plantation stocks are set to benefit from crude palm oil (CPO) prices, currently trading at above RM2,700 per tonne.
Pankaj Kumar
Chief investment officer
Kurnia Insurans
Outlook: Bullish than bearish. Similar to 2010, we expect the year 2011 to be a year of two halves, with the better half being the first half (1H) as the market rides on momentum carried through from this year as well as driven by the strong liquidity factor. We also have likely further impetus for the market in terms of pre-election rally as well as awards of contracts, especially those related to the ETPs and oil and gas sectors.
With the economy expected to grow at between 5% and 6% next year, much of the year's growth will be front-loaded due to the base effect while earnings momentum of mid-to-high double digits will see investors' attention on the market remaining strong. We are also happy to note the return of foreign funds especially with the expected further sell down in stakes in GLCs. We expect the market to peak at about 1,650-1,700 points during the 1H of 2011. With the 10%-12% gain in 1H, market pundits will be looking for fresh impetus to take the benchmark index higher but we believe this will be tough on two grounds. First, economic momentum into 2H of 2011 is expected to be slower and with inflationary pressures kicking in, we expect the market to suffer. On top of that, we expect worries of economic conditions in the United States, Europe and China to impact investors' confidence while a re-lapse of sovereign crises in Europe to have major effect on market sentiment. Overall, we expect the KLCI to retrace in the 2H of 2011 with the benchmark index seen settling the year at between 1,400-1,450 points.
Concerns/challenges: Concerns for next year are mainly external but this will have impact internally.
After two years of hibernation, we expect inflationary pressure to be major threat to real economic growth as the Government unwinds subsidies for key basic necessities.
We are also concerned on the strength of the global economy in 2011 particularly that of China and the US as slower growth will eat into earnings momentum while sovereign risk will likely be another X factor for the market.
The year 2011 will also see investors paying close attention to earnings delivery as market's current high expectations needs to be met to attain key price target levels.
Locally, the key deliverable will be the ETP as the market will be closely monitoring the execution of key projects.
Another key factor for the market will be the upcoming elections as investors will probably scale down their market exposure should the Parliament dissolve.
Nevertheless if the ruling party is able to return to power with a handsome majority in the House, this will remove one uncertainty for the short to medium term.
Stock/sector picks: We foresee the banking, oil and gas, plantations and construction sectors to be major winners in the 2011 as these sectors ride on the Government's ETP, award of contracts, better consumer confidence (especially in the 1H of 2011) and higher commodity prices. In terms of stock picks, we favour CIMB, RHB Cap, Malaysia Marine & Heavy Engineering, Kulim, WCT and Gamuda. Selectively, we also like the UEM Land-Sunrise merged entity in 2011 as well as Hartalega in the gloves sector.
Andrew Wong
Chief investment officer, Equities, Funds Management Division,
AmInvestment Bank Group.
Outlook: Equity valuations are not cheap but not at levels that would impede performance. Post third quarter earnings, consensus earnings have been upgraded from 24% to 29% and 12% to 16.5% respectively for 2010 and 2011.
All in all, with abundant liquidity, decent GDP growth of above 5%, firm commodity prices, M&A pipeline and hopefully a properly executed ETP, the market should likely provide either a high single or low double digit return for 2011.
2011 will be the third year of this recovery and it is normal to expect some PE multiple expansion as investors become convinced of the new business cycle. We do not have any reason to doubt that it will be any different this time.
Concerns/shallenges: We believe that the key domestic risk would be policy implementation and execution especially with regards the ETP and public private partnership projects that could potentially generate RM125bil construction works. Key external risk includes sovereign debt concerns/credit quality deterioration in the peripheral EU countries which could cause volatility to the market and US dollar strengthening which generally has a negative correlation with stock prices.
Stock/sector picks: AirAsia for its strong earnings growth going forward for Air Asia Malaysia as air travel demand recovers in tandem with economic recovery.
We expect to see 13% to 17% earnings growth in FY2011 to FY2012. Growth will be driven by passenger growth and higher yields (due to maturity of routes and higher air fares and ancillary income).
Among key risks to the stock is a sudden spike in oil prices. Axiata for its earnings growth from diverse earnings stream from the regional countries and its strong fundamentals; We also like Dialog for its business model as an integrated tank farm terminal player. Starting from engineering, procurement, construction and commissioning jobs, down to concession earnings and plant maintenance, the group is able to provide services and create value all the way down the value chain.
