As Asia prepares to welcome the Lunar Year of the Snake, most major global and regional indices are trading at or near all-time highs. The benchmark MSCI Asia-Pacific Index rose to its highest level in 18 months as U.S. payrolls expanded and China’s services industries grew at the fastest pace since Aug, fuelling optimism in the global economic recovery. The Dow Jones Industrial Average exceeded 14,000 for the first time since Oct 2007 while the S&P 500 rose 5.2% in Jan for its strongest start since 1997, leading global equities higher and beating bonds, commodities and currencies. Meanwhile, the MSCI World Index of stocks in 24 developed markets rose 5% in Jan (the most since 1994) as investors pumped record deposits into mutual funds and U.S. profits rose for an 11thq uarter amid improving economic growth in Europe and China while central banks kept interest rates at record lows.
Global dan Regional Index Stats (click to enlarge):
The last time U.S. stocks had a better start was in1997 when the S&P 500 rose 6.1% in Jan to end the year with a 31% gain. Wall Street’s current jubilant narrative is that a rush into stocks by small investors has sparked a “great rotation” out of bonds into equities that will power the bull market to new highs. Investors poured USD39b into equity mutual funds globally this year, more than double the amount for the comparable period in 2012 (based on data from EPFR Global) although this pales in comparison to the USD250b that was withdrawn in the past four years following the 2008 financial crisis which wiped out USD11t in market value. Global equities have traded at an average 17.6x earnings since the bull market began while the MSCI World Index’s multiple is now at 16.6x or 22% below its average since 1995.
Malaysia has lagged its regional peers in the past year following a number of sell-downs in the last three months ahead of an imminent General Election (GE13) which must be called before Jul 2013. This has made Malaysian stocks more volatile than the MSCI Emerging Markets Index for the first time since May 2008, and the increasing market volatility in the run-up to GE13 will increase the volatility and risk premium of Malaysian equities, thus causing the local bourse to underperform its regional peers. This is unfortunate as international investors are the most bullish on stocks in the last 3½ years, with close to two-thirds of respondents in a Bloomberg poll planning to raise their holdings of equities during the next six months while 53% expect equities to offer the highest return in the next year. We advocate a defensive strategy (including taking some profits off the table) in 1Q13, holding a portfolio of sustainable, high dividend-yielding stocks in the telco, consumer and REIT sectors which are less sensitive to political risk sentiment. We are Overweight banking, construction, gaming, oil & gas and M-REITS. Our 2013 YE target of 1,710 is based on an unchanged valuation basis of 13.5x 12M forward earnings (pegged to one SD below the KLCI’s mean PER) after imputing slower earnings growth of 10.8% in 2012 and 8% in 2013 versus 9.4% in 2011.