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Are we not in a crisis?

  • Despite intervention Italian bond yields shot up 80bp in a week, yield on 2-year Greek note now at over 50%, credit default swaps in Europe shot to new records and interbank lending at 30-months low. Growth in eurozone in 3Q not likely to improve from 0.2% in 2Q while Greece is sinking faster than expected.
  • Germany has curbed power of rescue funds and recent political development show strong oppositions to bailouts of debt-saddled nations. There is no political solidarity in eurozone and without coordinated policy response, the market will impose its own solutions which will be brutal and messy.
  • Zero job creation in US in August and downward revisions for June and July further affirm a weakening recovery that could easily fall into contraction. The job numbers suggest that US economy has been in recessionary mode for the last 4-5 months.
  • Obama’s job plan this Thursday is unlikely to be a game changer as his chances of unveiling big, bold spending initiatives look slim. A stimulus plan will be constrained by budget cuts, tight debt ceiling and political deadlock.
  • On domestic, we have lowered EPS growth numbers to +9.7% (from +11.2%) for 2011 and +11.2% (from +14%) for 2012 with downside risk. New YE KLCI target downgraded to 1,520 from 1650. We also introduce 2012 YE target of 1,650.

Domestic corporates

Earnings forecasts and target downgraded. We have lowered our expectations based on the dismal 2Q results and in view of protracted soft patch in US and worsening sovereign debt crisis in Europe. Besides lowering our earnings forecasts, we also expect lower PER multiples of 13.6x 2012 from 14.6x due to rising risk aversion. Note that there is a further downside risk to our numbers given that the debt crisis in Europe is fast turning into solvency crisis of states and banks while US could easily slip into a double dip.

On specifics, major earnings disappointments came from MMHE, Bumi Armada, Axiata, Maxis, MISC , Tenaga, CIMB, RHB. Positive surprises came from plantations. Major earnings downgrades were for Tenaga and MISC. Rating upgrades were mainly smaller caps while major downgrades (to SELL) were KNM, MISC and Proton. Despite challenging environment, we maintain loans growth forecast of 12.5% for 2011 but lower 2012 to 10.4% from 11.5%.

We remain defensive at the core. Hold on to domestic focussed stocks in construction and O&G while telcos and M-REITs are still good for yields. We have replaced Axiata with TM in our Top Buy list and incorporated new growth (SOP, TSH) and value stocks (BIMB, MPHB, Hartalega) . Among the big banks, only AMMB make the grade.

Net outflow of funds in August. Net foreign selling in Malaysian equities amounted to RM3.8bn in August, reversing 58% of the net inflow of RM6.6bn in the preceding 4 months. The last time we saw this magnitude of net selling was in February this year (- RM3.4bn). The big targets of selling were those with over 30% foreign shareholdings such as CIMB, Genting Bhd, Genting Malaysia, Gamuda, IJM, AirAsia. We estimate foreign shareholding have tapered off to below 22% (6% of which are strategic holdings).

The risk-off mode so prevalent now means that foreign money is not likely to be a positive contributor to the KLCI at least until global economic visibility becomes clearer.

Global Economics

European debt crisis worsening

Italy backtracked from its earlier commitment on budget cuts due to pressure from its voters. As a result, its 10-year bond yield shot up by 80bp in just about a week to now 5.65% despite ECB intensifying its purchases. The country still faces a possibility of a general strike as the government seek a USD65bn austerity plan.

Germany rejects deals on Greek collateral (in return for further aid) as well as a common bonds for the eurozone. The present government faces dissent within the coalition as well as losing supports from its voters who are opposed to bailing out the troubled PIIGs.

Bank meltdown in Europe cannot be discounted

European banks’ balance sheets are damaged from holding PIIGs debts. The feedback loop between the banking system and sovereign debt is creating fear. The market has punished banking stocks in belated recognition of undeclared liabilities. Meanwhile, the cost of insuring against bank failures have reached levels beyond even those seen at the height of 2008 subprime crisis.

There is a growing recognition that Europe banking fragility could become systemic and cause a second economically-debilitating credit crunch. European banks need to recapitalize but Chinese banks have cut credit lines and American money market funds have shifted away. Private sector recapitalization isn’t possible now that investors can’t be sure if banks are solvent. And public sector recapitalization is extremely hard given the fact that the eurozone economic structure is incoherent.

The reckoning may not be orderly but take a market-imposed chaotic course.

Add a comment »2 comments to this article

  1. With regards to stock investment in Malaysia, does anybody know that you can allocate a portion of the Account 1 balance in your EPF to trade in share stocks.
    This means that you can also decide for yourself which investment is appropriate for your retirement fund besides ‘unit trust’ alone.
    Want to know better, just e-mail to me at ‘[email protected]’.


  2. The crisis has pass… now we in Bull reign :) 2007-2011-2017 here we come ^_6



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