Stock-wise, investors should switch to bargain top-tier construction stocks Gamuda and IJM Corp which are expected to benefit from the second stimulus plan, says a head of research
It is an uphill battle as Puncak, Konsortium ABBAS and Splash have rejected the offer and requested negotiation for a higher price. The current development is not only positive for Puncak but other water players like KPS and JAKS that will benefit from the Langat 2 water treatment plant and construction companies like IJM Corporation, which will benefit from the inter-state water transfer project, and Gamuda.
The Consumer Price Index for January was released last Friday. It rose by an average 3.9 per cent year-on-year versus consensus expectation of 4.1 per cent but declined 0.1 per cent month-on-month, led by a slide in transport index. Not surprisingly, the index for food and non-alcoholic beverages price remains high as traders refused to budge and lower prices for their goods and services. It is just a matter of time before price competition hots up and they start feeling the heat and cut prices as unemployment is on the rise.
The recent exports, manufacturing sales and production numbers do not paint a bright outlook ahead and the fourth quarter gross domestic product data that will be released on Friday is likely to ascertain that. I'll be glad if it remains in the positive territory. If there is any growth, it is expected to be marginal at 1 per cent or less and the full-year expansion is likely to be capped at 4.9 per cent.
Thus, to keep the economic wheel spinning, measures that will be announced on March 10 should tackle the current downtrend from various angles, including public spending on projects that will have highest multiplier effects, personal tax cuts that will help increase disposable income, incentives that will sustain demand for properties that will sustain loan growth, handouts to low income group that was affected by job losses and making brave policy decisions that will keep us afloat and remain competitive in a globalised world.
This week, we will be entering the final leg of the results-reporting season for the fourth quarter, which will witness index heavyweights like Sime Darby, Maybank and Commerce announcing their results. Do not expect any positive surprises. The softened commodity prices and higher production cost dragged lower the earnings of many plantation companies and there will be no exception for Sime which will see lower activities in other business divisions as well. Maybank and Commerce are likely to report higher provisions, forex losses, and goodwill impairment (except Maybank as it has indicated the impairment will be done in June quarter) that eat up into their quarterly earnings. Thus, the KLCI is expected to correct further this week.
Technical outlook
Stocks ended mixed on Monday, dampened by profit-taking following the recent sharp rallies in water-related counters on privatisation talk of Selangor's water supply assets. Falls extended into the next day, depressed by a regional slump on concern banks may face ratings downgrades and further losses due to the deepening global recession.
However, the local market staged a rebound from earlier losses on Wednesday, copying a recovery in the region led by Hong Kong after the government said it will take more measures to alleviate the economic slowdown. The rebound extended into Thursday, encouraged by a rebound in the region due to a weaker yen which improved earnings prospects for Japanese exporters and China increased measures to stimulate its economy. The market tumbled anew ahead of the weekend, sparked by overnight losses on Wall Street
The KLCI fell from an intra-week high of 909.16 Monday to test a low of 888.73 by late Friday.
The daily slow stochastics indicator for KLCI dipped towards the oversold region following last Friday's heavy losses (Chart 1), but in stark contrast the weekly indicator flashed a buy signal. The 14-day Relative Strength Index (RSI) eased below the mid-point last Friday, while the 14-week RSI declined back below the 40-point mark.
Meantime, the daily Moving Average Convergence Divergence (MACD) trigger line hooked downwards and is poised to trigger a sell signal, but the weekly MACD extended its journey northwards. The +DI and the -DI lines on the 14-day Directional Movement Index (DMI) trend indicator have contracted and will trigger a sell signal on further weakness, but the ADX line slid lower below the 13-point mark, suggesting a trendless market.
Conclusion
Unfortunately, sharp losses on stock markets abroad filtered through to depress the local market, cutting short the bear market rally as investors moved back to the sidelines given fears of further weakness ahead. The possibility that the US government may nationalise banks laden with toxic assets, such as Bank of America and Citigroup, in the face of a deepening global recession was the main catalyst for last week's fall. Unless the US authorities pacify jittery investors by implicitly guaranteeing that the banks will remain private, further losses can be expected this week.
As for the KLCI, a decisive breakdown below the middle Bollinger band near 889 will grease downside towards the next meaningful support at 869, the 50 per cent retracement of the upswing from 801 pivot low to 936 high, which mirrors the late January lows. This important support must hold to prevent further losses towards the next cushion at 853, the 61.8 per cent retracement level. On the upside, expect immediate resistance from 900, with stronger resistance seen at 920.
Stock-wise, we recommend investors underweight banks such as AMMB and Maybank due to potential fallout from financial shares globally, and switch to bargain top-tier construction stocks Gamuda and IJM Corp which are expected to benefit from the second stimulus plan to be unveiled by the finance minister on March 10.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
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Shares on Bursa Malaysia suffered losses last week and gave back most of the previous two weeks' gains, as heavy declines in external markets sparked by deepening recession fears and concern that some US banks may be nationalised because of unquantifiable damage from toxic assets depressed local sentiment.
The Kuala Lumpur Composite Index (KLCI) lost 20.13 points, or 2.2 per cent, for the week to close at 889.71, as daily average trading volume and value shrank to 352.7 million shares and RM537 million respectively, compared with the 404.8 million shares and RM639.4 million average in the previous week.
The benchmark index sank unexpectedly last week as the market reacted negatively to worsening global economic outlook and domestic political uncertainties. The sharp contraction of Japanese economy at an annual pace of 12.7 per cent, the most since the 1974 oil shock, and bleak outlook statements from the US, Britain and the G7 finance ministers amplified the bearish sentiment in the local market.
Adding to the concerns was the federal government's decision to counter the Selangor state government's offer to buy water assets from the four concessionaries. Unfortunately, the fight for control of these assets will drum up the price and would make it difficult for the state government to provide this basic necessity at low prices should it succeed.
The Consumer Price Index for January was released last Friday. It rose by an average 3.9 per cent year-on-year versus consensus expectation of 4.1 per cent but declined 0.1 per cent month-on-month, led by a slide in transport index. Not surprisingly, the index for food and non-alcoholic beverages price remains high as traders refused to budge and lower prices for their goods and services. It is just a matter of time before price competition hots up and they start feeling the heat and cut prices as unemployment is on the rise.
The recent exports, manufacturing sales and production numbers do not paint a bright outlook ahead and the fourth quarter gross domestic product data that will be released on Friday is likely to ascertain that. I'll be glad if it remains in the positive territory. If there is any growth, it is expected to be marginal at 1 per cent or less and the full-year expansion is likely to be capped at 4.9 per cent.
Thus, to keep the economic wheel spinning, measures that will be announced on March 10 should tackle the current downtrend from various angles, including public spending on projects that will have highest multiplier effects, personal tax cuts that will help increase disposable income, incentives that will sustain demand for properties that will sustain loan growth, handouts to low income group that was affected by job losses and making brave policy decisions that will keep us afloat and remain competitive in a globalised world.
This week, we will be entering the final leg of the results-reporting season for the fourth quarter, which will witness index heavyweights like Sime Darby, Maybank and Commerce announcing their results. Do not expect any positive surprises. The softened commodity prices and higher production cost dragged lower the earnings of many plantation companies and there will be no exception for Sime which will see lower activities in other business divisions as well. Maybank and Commerce are likely to report higher provisions, forex losses, and goodwill impairment (except Maybank as it has indicated the impairment will be done in June quarter) that eat up into their quarterly earnings. Thus, the KLCI is expected to correct further this week.
Technical outlook
Stocks ended mixed on Monday, dampened by profit-taking following the recent sharp rallies in water-related counters on privatisation talk of Selangor's water supply assets. Falls extended into the next day, depressed by a regional slump on concern banks may face ratings downgrades and further losses due to the deepening global recession.
However, the local market staged a rebound from earlier losses on Wednesday, copying a recovery in the region led by Hong Kong after the government said it will take more measures to alleviate the economic slowdown. The rebound extended into Thursday, encouraged by a rebound in the region due to a weaker yen which improved earnings prospects for Japanese exporters and China increased measures to stimulate its economy. The market tumbled anew ahead of the weekend, sparked by overnight losses on Wall Street
The KLCI fell from an intra-week high of 909.16 Monday to test a low of 888.73 by late Friday.
The daily slow stochastics indicator for KLCI dipped towards the oversold region following last Friday's heavy losses (Chart 1), but in stark contrast the weekly indicator flashed a buy signal. The 14-day Relative Strength Index (RSI) eased below the mid-point last Friday, while the 14-week RSI declined back below the 40-point mark.
Meantime, the daily Moving Average Convergence Divergence (MACD) trigger line hooked downwards and is poised to trigger a sell signal, but the weekly MACD extended its journey northwards. The +DI and the -DI lines on the 14-day Directional Movement Index (DMI) trend indicator have contracted and will trigger a sell signal on further weakness, but the ADX line slid lower below the 13-point mark, suggesting a trendless market.
Conclusion
Unfortunately, sharp losses on stock markets abroad filtered through to depress the local market, cutting short the bear market rally as investors moved back to the sidelines given fears of further weakness ahead. The possibility that the US government may nationalise banks laden with toxic assets, such as Bank of America and Citigroup, in the face of a deepening global recession was the main catalyst for last week's fall. Unless the US authorities pacify jittery investors by implicitly guaranteeing that the banks will remain private, further losses can be expected this week.
As for the KLCI, a decisive breakdown below the middle Bollinger band near 889 will grease downside towards the next meaningful support at 869, the 50 per cent retracement of the upswing from 801 pivot low to 936 high, which mirrors the late January lows. This important support must hold to prevent further losses towards the next cushion at 853, the 61.8 per cent retracement level. On the upside, expect immediate resistance from 900, with stronger resistance seen at 920.
Stock-wise, we recommend investors underweight banks such as AMMB and Maybank due to potential fallout from financial shares globally, and switch to bargain top-tier construction stocks Gamuda and IJM Corp which are expected to benefit from the second stimulus plan to be unveiled by the finance minister on March 10.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
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