China To Maintain Stimulus As Economy Faces Fresh Woes.

BEIJING: China's top economic official cautioned that the country faces possible new problems and said Beijing will continue its stimulus policies because a recovery still lacks a solid foundation, according to comments reported yesterday.

Premier Wen Jiabao warned against being "blindly optimistic" despite improvements in economic growth, according to a report on the Cabinet's website.

"Economic operation still faces many new difficulties and problems," Wen was quoted as saying during a visit to southeastern China that ended yesterday.

He cautioned that the effects of some government measures might fade while others would take time to show results, the statement said. It gave no other details of potential problems.

Wen said Beijing will stick to policies meant to boost domestic demand, maintain easy credit and promote efficiency, the statement said. The government is in the midst of a two-year, 4 trillion yuan (100 yuan = RM52) stimulus that is meant to insulate China from the global downturn by boosting domestic consumption.

A drop in new yuan bank loans in July to 356 billion yuan, compared with an average of over 1.2 trillion yuan in each of the first six months of the year, has created worries among some analysts that the recent rebound in growth could be knocked off track.

Wen's comments echoed his repeated recent warnings against complacency and assurances that Beijing's stimulus spending and easy credit would continue. But they clashed with increasing optimism among financial analysts who say China is emerging from its economic slump.

China's economic growth accelerated in the latest quarter amid Beijing's huge stimulus spending but authorities have called for continued vigilance. They say weak corporate profits and other areas show a recovery is not fully established.

"The foundation of the economic recovery is not stable, not firm and not balanced, and we certainly cannot be blindly optimistic," Wen said during his visit to Zhejiang province south of Shanghai, according to the statement. - AP, Reuter

Market Outlook - Kaladher Govindan. FBM KLCI Ripe For Correction

Lower liner steel and construction-related stocks Sino Huaan, Kinsteel, Perwaja, MRCB, Ranhill and UEM Land remain top technical picks to out-perform the broader market.

RESURGENT rotational buying of lower liners and better-than-expected economic data from US, Europe and Asia managed to lift the local stock market and the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) for a fifth straight week of gains to track a 13-month high.

Plantation stocks led the way as investors increased their bet that commodities will see a revival in demand with the eurozone registering better-than-expected gross domestic product growth in the second quarter and China's resilient retail sales expansion of 15.2 per cent in July.

For the week, the FBM KLCI rose 3.69 points, or 0.3 per cent, to end at 1,188.57. Gains in IOI Corp (+3.42 points for the FBM KLCI), Sime Darby (+2.39), and KLK (+2.38) were offset by losses in Maybank (-4.23) and Genting Bhd (-1.47). Average daily traded volume and value recovered to 1.07 billion shares worth RM1.58 billion respectively, compared with 961.3 million shares and RM1.54 billion in the previous week.

Global market trends played a crucial role again in the FBM KLCI's movement last week. After reacting positively to the US market's performance on Monday, the FBM KLCI went into a sharper correction on Wednesday when worries about earnings surfaced after China warned about a slow recovery in its exports. Although the 23 per cent contraction in China's exports for July met consensus expectation, it was higher than June's contraction of 21.4 per cent,thus the worry that domestic expansion may not rise fast enough to absorb the impact of slower recovery in exports.

News of better-than-expected economic growth in Germany and France helped to breathe fresh life into the markets on Thursday that helped US equities to recoup early losses as an unexpected dip in the advance retail sales figure rekindled worries about the US economy. The Malaysian market reacted in tandem and rose close to the expected 1,200 resistance on Friday but closed lower ahead of the weekend.

From a fundamental viewpoint, trading at 16.4x CY10 PER, the FBM KLCI is more expensive than the benchmark indices of Singapore (14.8x), Indonesia (13x), Thailand (10.5x), South Korea (10.5x) and Hong Kong (15.1x), which explains in part the less vibrant foreign activities and more dominant participation of locals. Thus, the fact that the FBM KLCI has outperformed only the Nikkei and has underperformed the rest of the region in terms of year-to-date gain should not necessarily translate into an attraction unless earnings improve.

Until then, we should see more visible signs of a two-tier market where other big- and medium-cap plays playing catch-up with stocks listed in the benchmark index. While a minor setback in the benchmark index is expected this week, there are still buying opportunities.

It is heartening to see that big-cap plays like Commerce, AMMB and Air Asia reported better-than-expected earnings in the ongoing second-quarter 2009 results season. While Commerce is a "sell" as the share price has already fully factored in the earnings surprise, AMMB (Buy, Target Price: RM5.00) and Air Asia (Buy, RM2.20) are undervalued and worth buying.

AMMB not only has registered healthy loan growth and gained market share in deposits, it also has shown a steady improvement in containing costs after its solid partnership with ANZ Bank.

Despite a gloomy outlook for the airline industry caused by the spread of the influenza A H1N1virus, Air Asia has shown a strong load factor of 72 per cent as it steals customers from full-service airlines with its attractive promotions. Valuation wise, it is trading at a single digit FY10 PER of 4.6x only and appears attractive compared to rivals like Virgin Blue, Ryan Air and EasyJet.

Talking about A H1N1, expect this to be the single largest risk factor in the immediate term. The disruptions it causes to business will be great as the number multiplies and the private sector seems oblivious to the fact. Traders and pharmacies are seizing the opportunity to rake huge profits as face masks are in short supply. Some are even selling a piece for RM7 in Klang Valley claiming it to be of superior quality. The government has to ensure adequate supply of such items and take stern action against suppliers who hoard them. Corporations can view it as part of their Corporate Social Responsibility to supply free face masks to their employees.

Technical outlook

Shares on Bursa Malaysia managed to extend mild gains on Monday, helped by the less severe US jobless rate and a surge in Hong Kong stocks to an 11-month high. On the next day, as blue chips extended their profit-taking consolidation, cheap lower liners staged a strong comeback on resurgent rotational buying interest, highlighted by sharp rallies in lower liner rubber glove makers given the deteriorating health situation due to the H1N1 virus.

On Wednesday, stocks suffered a profit-taking correction triggered by sharp falls in the region led by Hong Kong and Shanghai after the mainland's ministry of commerce said efforts to boost domestic demand could not offset a huge export slump. The FBM KLCI subsequently fell to intra-week low of 1,178.51

However, stocks rebounded the next day in line with regional equities after the US central bank kept interest rates at record lows and said the recession is easing. The profit-taking consolidation extended ahead of the weekend, but the KLCI managed to rise to a 13-month high of 1,196.46 before settling last Friday at 1,188.57.

The daily slow stochastics indicator for the KLCI has dipped to the neutral region following last week's sell signal at the overbought region (Chart 1), but the weekly indicator continued to claw higher into the overbought zone. The 14-day and 14-week Relative Strength Index (RSI) momentum indicators remained in overbought territory with a reading of 74.58 and 76.63 respectively.

Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator is in bearish mode following last Monday's sell signal, but the weekly MACD indicator continued its upward expansion. The 14-day Directional Movement Index (DMI) trend indicator is still in bullish trending mode, with a higher reading on the ADX line of 56.54 as of last Friday.

Conclusion

The lower-than-expected US consumer confidence data and sharp fall in commodity prices last Friday due to concern the steep five-month recovery since March has lifted share prices to become overpriced should spark profit-taking correction in the region early this week. Nonetheless, expect the profit-taking correction to be shallow given that most investors would have sold on rally the previous few weeks, and are looking to buy back upon a more significant correction. Core blue chips are expected to consolidate while buying interest shifts towards lower liners on active rotational plays.

On blue chips, investors should buy on dip defensive gaming stocks Genting Bhd and Genting Malaysia given that the H1N1 virus scare has pressured share prices down to more bargain levels. Lower liner steel and construction-related stocks Sino Huaan, Kinsteel, Perwaja, MRCB, Ranhill and UEM Land remain top technical picks to out-perform the broader market. Also buy on dip Kencana and Wah Seong, while buy DNP, Hovid, Leader and RCE Capital on any profit-taking dips.

As for the KLCI, immediate support upon correction is set at 1,180, with 1,171, then 1,164 and 1,156 acting as stronger support platforms. On the upside, the significant upside hurdle will be at the 1,200 psychological level, which requires a bullish breakout to aid further upside towards 1,220, and then 1,248, which represents the 61.8 per cent FR of the fall from 1,525 all-time high to 801 pivot low, acting as a major resistance.

Malaysian Stocks Overvalued: OSK

Malaysian stocks, trading near a one-year high, face the risk of an “Edwardian Summer” that may end with a “crash” as shares are overvalued amid shrinking earnings, according to OSK Research Sdn Bhd.

“As with any Edwardian Summer, the longer it lasts, the more out of touch it gets with its fundamentals, and the greater the crash at the end,” OSK said in a report today. “The market is definitely overvalued.”

Investors should sell “into strength” and buy selected shares such as property developer Malaysian Resources Corp and Top Glove Corp, the world’s largest rubber glove maker, OSK said. It removed Public Bank Bhd from its top five picks.

Top Glove, the world’s biggest rubber-glove maker, gained 4.8 per cent to RM7.23 at midday, set for the largest increase since July 7.

The benchmark FTSE Bursa Malaysia KLCI Index rose 9.3 per cent last month, the steepest increase since April. The measure has risen 34 per cent this year, as the government’ stimulus plans and a RM10 billion fund set up to invest in publicly traded companies helped buoy the market.

Prime Minister Datuk Seri Najib Tun Razak, who took office on April 3, has announced stimulus plans valued at RM67 billion to revive economic growth.

OSK likened the market’s outlook to the “Edwardian Summer” in the UK during the reign of King Edward VII from 1901 to 1910. The Edwardian era was regarded as a romantic golden age of long summer afternoons, garden parties and big hats immediately prior to the First World War.

The stock index is trading above 17 times 2009 earnings, higher than the average of 15 times since 2000, OSK said. Companies in the index were trading at 15.5 times in 2006 and 2007 when earnings growth was averaging 30 per cent growth, it said.

With earnings set to shrink in 2009 and grow at only 12 per cent in 2010, the current price to earnings multiple is “excessive,” it said. -- Bloomberg