M’sian equities to see recovery in Q4

KUALA LUMPUR: Political risk is no longer an overriding factor for the Malaysian market and the country could see a recovery by the fourth quarter of the year, says Citi Investment Research.

Its director and Malaysia head of country research, Choong Wai Kee, said that political risk was an issue after the March 2008 elections but it was no longer now as the political risk premium was lower. Risk premium refers to the extra return that an asset has to provide investors for the unique risk that it carries.

“One of the reasons for this (the risk premium coming down) is that while it was shocking that certain states had changed government (in March), in practice, the process has been quite smooth.

“This has led to Malaysia being one of the top performing markets as othersin the region have tumbled,” he told a press briefing yesterday.

As for the leadership change in March when Deputy Prime Minister Datuk Seri Najib Razak will take over as Prime Minister from Datuk Seri Abdullah Ahmad Badawi, he said: “I think the market had factored in leadership change already.”

Choong Wai Kee

On the economic outlook, he said Citigroup had reduced its gross domestic product (GDP) forecast to 0.5% for this year from 3.1% previously on rising macro-economic risks. The forecast was the lowest compared with a Bloomberg survey of an average 1.5% growth while the Government projected a 3.5% growth.

Choong said the weaker outlook was due to Malaysia’s declining exports and weakening economic data in export markets of Europe and the US. Exports fell for a second consecutive month in November, contracting 4.9% from a year ago.

He said the Government’s more optimistic GDP outlook could be due to proposed RM7bil fiscal pump-priming “which is the most relevant measure to take at this time” while another package was in the works.

Citigroup also maintained its expectation of a 50- to 75-basis-point cut in the overnight policy rate by Bank Negara in the first quarter from 3.25% now.

On its investment strategy, Choong said investors should stock pick and focus on companies which had been badly sold down, including AMMB Holdings Bhd, IGB Corp Bhd, KLCC Property Holdings Bhd and Tanjong plc. Citigroup liked the large capitalisation stocks with good liquidity.

On a quarterly basis, the bank is forecasting a 0.9% fall in GDP growth for Malaysia in the first quarter, then remaining flat in the second and third quarters at 0% growth and to recover in the fourth quarter.

“Hopefully the market will bottom out in the first quarter, giving you plenty of time to pick your stocks in the second and third quarters,” Choong said.

On the banking sector, Citigroup vice-president of financial institutions research Malaysia, Julian Chua, said asset quality would be the main concern for 2009.

“Banks would be unlikely to be looking at growth,” he said. While non-performing loans (NPLs) had been low so far, they were likely to rise “as economic activity declines”.

NPL risks lay in the consumer and manufacturing sector, he said.

“Consumers would be affected by retrenchment activity and manufacturing sector is already seeing strain in export slowdown,” Chua said.

Mitigating factors for Malaysian banks were that they had already beefed up risk management processes, generally lending had not been overly aggressive, the banking system was relatively liquid with low loan-deposit ratio and the banks were generally well capitalised.

As for mergers and acquisitions (M&A) of regional expansion ambitions, Chua saw this as unlikely.

“It is still too early to look at M&A. Because earnings visibility is low going forward, banks would rather conserve capital than make acquisitions,” he said.

Investment banking income this year was also expected to be low until the possible fourth quarter market recovery.

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The Star