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Malaysia stocks seen on firm upward trend

KUALA LUMPUR: Malaysia's stock market is set for an upward ride in coming months on the back of the country's re-entry into an international benchmark index, firmly putting behind a difficult period of the past two years.

The market is now taking a breather but there is little on the horizon that could rein in the anticipated rally unless Wall Street takes a sharp beating, analysts said.

"With ample liquidity, low interest rates and a growing economic recovery, the environment for stocks is favourable in the near term," said an analyst at a brokerage.

Malaysia's return to the Morgan Stanley Capital International (MSCI) investment indices on May 31, less political uncertainty and healthy corporate earnings are expected to add to the strength of the market, which has gained 17 percent this year.

Merrill Lynch put the benchmark Kuala Lumpur Stock Exchange Composite Index (KLCI) target for 2000 at 1,300 points, near a record high of 1,332. This compares with 949.85 on Friday. The index dived to 261.33 in September 1998.

Despite lingering concerns as such as an interest rate hike and the release of Malaysian stocks formerly traded in Singapore's over-the-counter market, longer-term trends are good.

"Strong liquidity and pent-up demand for IT and Internet stocks will drive the stock market in the months ahead," said G K Goh Research. "We maintain our mid-2000 KLCI target of 1,130 and year-end target of 1,250."

The central bank may hike rate if inflation became a threat, a move that would draw funds away from the stock market. But Bank Negara had said that inflation which is projected at 3.2 percent this year was within a comfortable range.

Kuala Lumpur is one of Asia's best performers this year. Based on Friday's closings, South Korea is down 18 percent this year, Singapore down 13 percent while Hong Kong is flat.

Analysts said the KLSE correction from an overbought position -- it lost some nine percent to a low of 922 points on March 9 from 1,021.20 on February 18 -- offered good buying opportunity.

Some $2 billion of foreign portfolio money entered the market during the first two months of this year.

Lippers Asia Ltd, a Reuters company, said foreign funds stood at $2.9 billion on March 27, down 7.2 percent from a month ago.

"We expect to see a second wave of foreign portfolio funds come into the market around the period of Malaysia's reinstatement into the MSCI at end May," Merrill said.

MSCI has said that using stock data as of March 13, Malaysia would see its weightage in MSCI's Far East Free Ex-Japan index at 10.7 percent. Actual weightage when it rejoins the index next month will depend on KLSE's market capitalisation at that time.

MSCI dropped Malaysia from the index after the government imposed capital controls and pegged the ringgit currency in September 1998 as the country grappled with the Asian financial crisis.

"A 10 percent weightage will mean some 20-30 billion ringgit in foreign investments," said one local fund manager.

"Even if 10 percent or two billion ringgit come in, it will help move the market," he told Reuters.

Another fund manager said: "It's difficult for any foreign fund manager not to justify any weightings in Malaysia."

"We estimate that on average, fund managers globally have about four to five percent weightage in Malaysia currently," Merrill said. "That is still very underweight in our opinion for such a large market."

The political uncertainty over Prime Minister Mahathir Mohamad's succession has also been removed after a challenge by former finance minister Razaleigh Hamzah for top posts in the ruling UMNO party fizzled out.

"Market investors are likely to view this positively since it removes near-term uncertainty for Malaysia's political succession," one local brokerage said in a report.

Some analysts said they have raised Malaysia's earnings per share expectations by some 15 percent in 2000 and 13 percent in 2001 following better-than-expected 1999 results.

At 1,100 points, the Composite Index stocks will be trading at 23 times that of their financial year 2000 earnings -- a level that fairly prices the market -- and 19 times of FY2001 earnings.

So the upside potential is a rewarding 15 percent from Friday's closing level, analysts said.

KE-ZAN Securities Sdn Bhd said its top core picks were Public Bank Foreign, Commerce Asset-Holdings, Genting, United Engineers (M) and Tenaga Nasional.

"For the dare-devils, we have the highly rewarding tech stocks and the highly speculative political and thematic stocks," it said. They include Nikko Electronics and Malaysian Resources Corp Bhd. -Reuters