Analysis: Malaysia a booming market with Palm oil and Relaxed controls
After several years of lackluster performance, Malaysia is currently one of Asia's best-performing stock markets, drawing strength from attractive valuations, a fast-growing economy and more prudent government policies.
The Kuala Lumpur Composite Index has gained 23% year-to-date, outperforming many Asian markets, including Thailand, India, Indonesia, Singapore and Taiwan.
"Malaysia was really off people's radar screens for a couple of years," said David Riedel, president of the Riedel Research Group. But political uncertainty in neighboring Thailand, the relaxation of controls imposed during the economic crisis in the late 1990s and a surge in demand for palm oil, a key component of bio fuel, are combining to boost investor interest and confidence.
"If you put Malaysia in the context of Southeast Asia, political concerns about Thailand have forced managers to look for opportunities in other markets," he said. "People have been looking for an alternative. Malaysia has had relative undervaluation."
Equity funds tracked by EPFR Global were net buyers of Malaysian equities from November 2006 till April this year. In April alone, for example, those funds bought $523 million in Malaysian equities. Sentiment was slightly hurt in May, however, when these funds sold a net of $140 million.
"Without a doubt, Malaysia is in a bull market as the KLCI [Kuala Lumpur Composite Index] has risen 51% in the past 12 months," said Terence Wong, strategist at CIMB Research, in a recent research report.
The rally is good for another 12 months because earnings growth is continuing to beat expectations, Wong said.
But there are risks.
"While we remain bullish about stock market prospects, the greatest risk continues to be the performance of regional markets and Wall Street as a repeat of a major correction on this front will surely drag down Malaysia as well," Wong said. "However, it is reassuring that regional P/E valuations are undemanding, being mostly in the mid-to-high teens."
Diverse population
In the wake of a military coup last year in Thailand, Malaysia is seen as relatively stable. It has a multi-ethnic, multi-religious population of over 26 million. Its main exports are electronic equipment, petroleum and liquefied natural gas, wood products, rubber and palm oil. In 2006, the economy grew at 5.9%, while growth over the next two years is forecast at around 7%.
"After several years of lackluster returns, Malaysia started the year as one of the more attractively valued countries within the region in aggregate," said Andrew Foster is portfolio manager of the Matthews Asia Pacific Equity Income Fund MAPIX, which is overweight in Malaysia.
"Investors over the last several years have come to have a higher level of confidence in the new government -- reasonably higher degree of openness and transparency to foreign investors," Foster said.
However he acknowledges that the gains so far this year have made it less compelling. "By most measures, Malaysia is one of the more expensive markets now," Foster said. "The discount at the beginning of the year is less apparent."
David Semple, portfolio manager of the Van Eck Emerging Markets Fund GBFAX, shares that positive sentiment.
"We do find a lot of interesting stocks to buy," Semple said. "Domestic demand is going to be robust. It still has a somewhat undervalued currency and stable politics. It tends to be a little bit more defensive."
In Malaysia, he finds "solid, but not outrageous returns."
Two stocks he likes are the KNM Group , which designs and constructs equipment for the oil and gas industry, and the Dreamgate Corporation , which supplies gaming and amusement machines.
Attractive sectors
The consumer and infrastructure sectors are the most attractive on the Malaysian stock market, Riedel said. One gaming stock he likes is Genting ..
As for palm oil, he prefers manufacturers in Indonesia. Primarily grown in Malaysia and Indonesia, palm oil can be used to produce biofuel; it is also an ingredient in a host of other products.
"With the inflows of capital from equity investment and palm oil, the government is increasing infrastructure spending -- the full gamut of infrastructure -- roads, bridges, ports," he said. He recommends construction company WCT Engineering as a way to play infrastructure.
Wong of CIMB Research is very bullish on a number of sectors including airlines, banking, construction, gaming, infrastructure, oil and gas, plantation, property, rubber gloves and utilities.
His top five stock picks draw from these sectors. He likes construction company MRCB, because it is "one of the frontrunners for at least two local mega projects and will later add stable highway concession earnings to its income stream."
The other four are infrastructure group Gamuda; Maybank Group, the largest banking group in Malaysia; SP Setia, which is involved in construction and wood-based manufacturing; and Kencana Petroleum, which is involved in engineering and fabrication of production facilities for the oil and gas industry.
One way for American investors to gain exposure to the country is through the iShares Malaysia ETF EWM.
"In the context of global emerging markets, you'll see Malaysia continue to be strong," Riedel said. "[However,] if you see a real change in investor appetite for risk, if you see the carry trade unwind, it will be one of the first markets to suffer."
The Kuala Lumpur Composite Index has gained 23% year-to-date, outperforming many Asian markets, including Thailand, India, Indonesia, Singapore and Taiwan.
"Malaysia was really off people's radar screens for a couple of years," said David Riedel, president of the Riedel Research Group. But political uncertainty in neighboring Thailand, the relaxation of controls imposed during the economic crisis in the late 1990s and a surge in demand for palm oil, a key component of bio fuel, are combining to boost investor interest and confidence.
"If you put Malaysia in the context of Southeast Asia, political concerns about Thailand have forced managers to look for opportunities in other markets," he said. "People have been looking for an alternative. Malaysia has had relative undervaluation."
Equity funds tracked by EPFR Global were net buyers of Malaysian equities from November 2006 till April this year. In April alone, for example, those funds bought $523 million in Malaysian equities. Sentiment was slightly hurt in May, however, when these funds sold a net of $140 million.
"Without a doubt, Malaysia is in a bull market as the KLCI [Kuala Lumpur Composite Index] has risen 51% in the past 12 months," said Terence Wong, strategist at CIMB Research, in a recent research report.
The rally is good for another 12 months because earnings growth is continuing to beat expectations, Wong said.
But there are risks.
"While we remain bullish about stock market prospects, the greatest risk continues to be the performance of regional markets and Wall Street as a repeat of a major correction on this front will surely drag down Malaysia as well," Wong said. "However, it is reassuring that regional P/E valuations are undemanding, being mostly in the mid-to-high teens."
Diverse population
In the wake of a military coup last year in Thailand, Malaysia is seen as relatively stable. It has a multi-ethnic, multi-religious population of over 26 million. Its main exports are electronic equipment, petroleum and liquefied natural gas, wood products, rubber and palm oil. In 2006, the economy grew at 5.9%, while growth over the next two years is forecast at around 7%.
"After several years of lackluster returns, Malaysia started the year as one of the more attractively valued countries within the region in aggregate," said Andrew Foster is portfolio manager of the Matthews Asia Pacific Equity Income Fund MAPIX, which is overweight in Malaysia.
"Investors over the last several years have come to have a higher level of confidence in the new government -- reasonably higher degree of openness and transparency to foreign investors," Foster said.
However he acknowledges that the gains so far this year have made it less compelling. "By most measures, Malaysia is one of the more expensive markets now," Foster said. "The discount at the beginning of the year is less apparent."
David Semple, portfolio manager of the Van Eck Emerging Markets Fund GBFAX, shares that positive sentiment.
"We do find a lot of interesting stocks to buy," Semple said. "Domestic demand is going to be robust. It still has a somewhat undervalued currency and stable politics. It tends to be a little bit more defensive."
In Malaysia, he finds "solid, but not outrageous returns."
Two stocks he likes are the KNM Group , which designs and constructs equipment for the oil and gas industry, and the Dreamgate Corporation , which supplies gaming and amusement machines.
Attractive sectors
The consumer and infrastructure sectors are the most attractive on the Malaysian stock market, Riedel said. One gaming stock he likes is Genting ..
As for palm oil, he prefers manufacturers in Indonesia. Primarily grown in Malaysia and Indonesia, palm oil can be used to produce biofuel; it is also an ingredient in a host of other products.
"With the inflows of capital from equity investment and palm oil, the government is increasing infrastructure spending -- the full gamut of infrastructure -- roads, bridges, ports," he said. He recommends construction company WCT Engineering as a way to play infrastructure.
Wong of CIMB Research is very bullish on a number of sectors including airlines, banking, construction, gaming, infrastructure, oil and gas, plantation, property, rubber gloves and utilities.
His top five stock picks draw from these sectors. He likes construction company MRCB, because it is "one of the frontrunners for at least two local mega projects and will later add stable highway concession earnings to its income stream."
The other four are infrastructure group Gamuda; Maybank Group, the largest banking group in Malaysia; SP Setia, which is involved in construction and wood-based manufacturing; and Kencana Petroleum, which is involved in engineering and fabrication of production facilities for the oil and gas industry.
One way for American investors to gain exposure to the country is through the iShares Malaysia ETF EWM.
"In the context of global emerging markets, you'll see Malaysia continue to be strong," Riedel said. "[However,] if you see a real change in investor appetite for risk, if you see the carry trade unwind, it will be one of the first markets to suffer."
posted by bizzwhizz at 1:16 PM
1 Comments:
The real rising star of the region is Malaysia. It will be interesting to see if Dubai or any other gulf city attains that sustainable growth level any time soon.
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