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Market Focus
(023849) 1 Sep 2010

Topping out

Field day for the index bulls

Bulls outshined the bears up to this juncture as displayed on the persistent rise of the FBMKLCI. Rebounding
from an intermediate low in May 2010, the market has maintained a steady up-trend course to chart higher
peaks above 1428 despite some hiccups along the way. External economic numbers were at best mixed
causing volatile market reaction in overseas market mainly but the local bourse was resilient amidst such
global reactionary sell-downs. Locally, a better GDP in 1Q2010 albeit expected coupled with expectations of
a stable interest rate environment for the rest of the year contributed to initial part of the current “rally” which
begin in mid-May 2010.

The local bourse being a relatively “closed market” with minimal foreign participation has its virtue through
reduction of exposure to global wild gyrations which make the local bourse a relatively defensive market. This
contributed to its steady ascent despite a generally volatile external markets environment. Nevertheless, we
detected a lack of “mass participation” in the market where the actions were mainly confined to rotational
plays with short-term life-span. As a result, market volume despite firming up of late is still no where near the
2-3bn seen during the run-up during the early part of the year. Index linked stocks also dominated the rally
despite the apparent lack of market volume and depth and helped pushed the FBMKLCI to a new year’s high.
It was a field day for the index bulls.

Another wave of liquidity to provide second wind?

Having gone through a relatively robust first-half of the year which stayed firm till now, current expectations
are that the later part of the year may not be as rosy and more fiscal stimulus may be necessary to keep the
recovery engine humming. The jobless situation in the US is still weak while its housing market had declined
following the termination of a federal tax credit program in July 2010.

Nevertheless, indications from global financial stewards like the US Fed are positive in the sense that they
remain willing to commit more liquidity into the system should the need arises. This concurs with our view that
market perception is counting on the governments to inject liquidity to prevent price deflation. Assuming that
the economic numbers continue to be less than encouraging, another wave of liquidity injection may be a
likely course of action which may inflate financial markets in general.

Neutral valuation leaves room for upside but market getting highly overbought

The local market average valuation is currently at 15x forward PE, a relatively neutral level which leaves room
for further expansion on the upside. The potential is supported by the following factors :-

(i) Expected GDP growth of between 6-7% in 2010

(ii) Steady interest rate regime
(iii) Sentiment uplift from follow through of new macro-economic measures
(iv) Pickup in return of foreign funds driven by stronger ringgit

Looking at the charts, our technical chartist is of the opinion that the market as per the FBMKLCI is getting
overheated and a pull-back is likely to happen in the immediate to the short term. In addition, global markets
appears to picking up speed heading south which will exert pressure on local sentiment and test the market’s
resilience to its limit.

Hence, our strategy is to BUY ON WEAKNESS for the months ahead as we believe the market is topping
out. Below is a PER/ROE matrix of selective stocks. The best value stocks are those found within the oval
which highlights stocks with PERs below 15.0x and ROEs above 20%.

F o r P r iv a t e C i r c u l a t i o n O n l y
Market Focus

FY 2010 PE (x)

23.0 MYEG

21.0

19.0

QL
17.0 KPJ
Cocolnd
CMMT
15.0
MEGB
Axreit
13.0
Kossan

11.0 Ahealth Daiboci Mam ee

Padini
9.0 AZRB
SYS Aeoncr
Delloyd
7.0 Tecnic

5.0
5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
ROE (%)

TOP PICKS FOR BUY ON WEAKNESS

Counters Code Price (RM) Chart Support (RM)

MEGB 5166 3.90 3.70, 3.50

Kossan 7153 3.40 3.00, 2.70
Mamee 5282 3.34 3.20, 2.80
Padini 7052 4.00 3.80, 3.45
AEONCr 5139 3.00 3.50, 3.20
Market Focus

Appendix – Charts of top picks

MEGB

Kossan Rubber
Market Focus

Mamee

Padini
 Market Focus

AEONCr

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