Fund managers in the US and Europe are more upbeat about Malaysia than a year ago but there was genuine surprise that earnings growth of KLCI stocks in 2007 has been so strong, said CIMB Research.
The research house said it was upbeat that 2008 was likely to be another strong year and this provided the most important fundamental support for the bullish undertone for 2008.
“We maintain our Overweight stance on Malaysia with Kuala Lumpur Composite Index (KLCI) targets of 1,440 for end-07 and 1,700 for end-08,” said CIMB Research, which had just completed a two-week roadshow in Europe and the US and meeting more than 40 fund management firms.
CIMB Research said although Malaysia’s recent underperformance drew some negative comments, investors in general were positive about the country’s prospects and were looking for good stock ideas with great fundamentals.
It said European and US investors remained keen to hear about Malaysia and were seeking good stocks to buy and companies with strong fundamentals, good management, attractive valuations and robust earnings growth.
On its meeting with 22 investors in Europe including those in London, Amsterdam and Edinburgh, it said they were roughly overweight, neutral and underweight in equal numbers.
However, they were significantly more bullish than last year but they were disappointed with Malaysia’s performance in the last six months after its sterling performance at end-2006 and early 2007.
CIMB Research said the fund managers’ biggest source of discontent was Tenaga Nasional Bhd’s poor share price performance and gas price worries.
Overall, investors did not appear overly concerned about the US subprime issue and none raised any questions whether Malaysian companies had any exposure.
CIMB Research said among the key stocks it recommended were Malaysian Resources Corporation Bhd (MRCB) due to election rally, Gamuda Bhd (Ninth Malaysia Plan and pump priming), SP Setia Bhd (property boom), Tenaga Nasional Bhd (government-linked companies revamp) and LCL Corp Bhd (small cap pick).
European investors appeared to be most enthusiastic about MRCB, Gamuda and LCL Corp, it said.
Although many European funds are buy-and-hold and longer-term investors, there are several hedge funds looking for trading ideas.
The research house said it had recommended MK Land Holdings Bhd (Trading Buy) since the proposed private placement has to be undertaken at no less than the RM1 par value and at that time, the stock was trading at only 80 sen to 85 sen. It also introduced Silver Bird Group Bhd (Trading Buy) as a possible takeover target.
“Several funds were looking for very long-term investments in physical assets or REITs (real estate investment trusts),” it said.
CIMB Research said during its roadshow in the US, fund managers familiar with Malaysia were mostly neutral to overweight on the market while newer funds and those less familiar with Malaysia had zero exposure but appeared keen to add positions.
However, some US investors were frustrated at Malaysia’s underperformance relative to the region. It said there was some unease over Malaysia’s underperformance in recent months and that it had yet to set new highs after the July-August global market rout.
“Several investors very familiar with Malaysia voiced their unhappiness with the country’s pace of political development and GLC revamp,” it said.
There were also hedge funds with very aggressive trading strategies looking for short-term trades and stocks which attracted interest were Gamuda, Hunza Properties Bhd and LCL Corp.
“Somewhat to our surprise, many US investors had visited Malaysia in the past year and those who were unfamiliar with the country were interested to visit, especially the Iskandar Development Region,” it said.
On Malaysia’s economic outlook, the research house said the fund managers were positive about the domestic economy.
CIMB Research had recently raised its 2007 GDP growth estimate from 5.6% to 5.8% and expected continued robust growth of 6.3% in 2008.
Growth catalysts would be strong domestic demand, higher government spending under the 9MP and a gradual recovery of exports in 2008.
However, there was concern among some fund managers over the impact of exports’ slowdown on GDP growth. CIMB Research said continued strong domestic demand, which made up 86.3% of total GDP, should mitigate the impact of lower exports on overall GDP growth.
“With private consumption accounting for 50.5% of GDP and total fixed capital formation making up another 23.2% of GDP, these two main components of total aggregate domestic demand should help to compensate for the slower growth in exports,” it said.
The research house said for every one percentage point decline in US GDP growth, it could cut Malaysia’s export growth by 0.8 percentage point, potentially shaving one percentage point off Malaysia’s GDP growth. Malaysia’s total exports make up 122% of total GDP.
“But the net impact is lower after adjusting for imports. Given our belief that domestic demand should remain strong and offset the slower external demand, the real impact on domestic growth should remain manageable,” it said.
source EdgeDaily
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