Why liquidity will still dictate the market in 4Q12
Stocks to Buy:
• The Fed’s ‘open-ended’ QE3 and ECB’s Outright Monetary Transactions (OMT) are the biggest monetary stimulus to date.
• The transmission mechanism of QE3 and OMT will be asset prices — property and stocks. The authorities effectively want asset prices to climb.
• Commodity prices will be on an uptrend and dollar to remain under pressure. These correlate well with equity.
• There are risks such as rapid deterioration in China’s economy, major bank failures, and abrupt contraction in the US economy but the event probability is low in our opinion.
• Any downside will be mitigated by the substantial cushion of idle liquidity in the system. Local investors have been consistent net sellers this year.
• In addition, despite its premium relative valuation vis-à-vis other regional bourses, the FBM KLCI is currently trading at a discount relative to its historical yardstick.With liquidity programmes, lower risk of an equity meltdown
• With QE3 and OMT, the market will enjoy liquidity support, riding on Asia’s calling attraction. The challenge is for Malaysia to strengthen the case for this liquidity to stay in the system.
• The economy appears to be on a strong footing, driven by domestic consumption and investment.
• Corporate Malaysia appears to be cruising with earnings growing steadily and no major downside expected in 4Q12. Stronger conviction, the market is looking good
• We revise our FBM KLCI 2012 year-end target from 1,600 points to 1,670 points (PER of 15.4x CY2012 earnings).
• In tandem with the revision in our 2013 GDP growth forecast to 5.8%, we revise our FBM KLCI 2013 year-end target from 1,690 points to 1,750 points, reflecting a PER of 14.7x (CY2013 earnings). This jives with our FBM KLCI bottom-up valuation of 1,742 points.
• The additional liquidity from QE3 should benefit higher betastocks. Nevertheless, there are underlying event risks which necessitates further screenings of both quantitative and qualitative attributes.
Stocks to avoid