KL market may start to falter: Maybank Investment

A 'recession in corporate profits' may have just begun as 63 per cent of companies under Maybank's coverage had reported lower sequential quarterly net profits.

THE Malaysian stock market rally has reached a point where it may start to falter, says Maybank Investment Bank."We believe this market rally has pushed valuations to the point where growth expectations have reached implausible levels.

In fact, (corporate) profits have just begun to turn down," its analyst Andrew Lee said in a report yesterday.A "recession in corporate profits" may have just begun, he said, pointing out that 63 per cent of companies under Maybank's coverage that had released their first quarter financial results had reported lower sequential quarterly net profits."History tells us the bear market isn't over," Lee remarked.

Still, Maybank isn't overly bearish on the market. It has more "buy" recommendations on companies than "sells"."We are not overly bearish but we caution that optimism over growth can disappear as quickly as it appeared," he said.

The Kuala Lumpur Composite Index (KLCI), which rose at an eighth-month high of 1053.14 on Monday, may fall to 990 by the year-end, he said. Yesterday, it eased 1.51 points to 1051.63.

The market had risen in recent weeks, fuelled by liquidity and optimism that the worst of the global recession is over.It currently trades at 15.2 times this year's estimated earnings, up from 12 times earlier in the year, which Lee considers too expensive seeing as corporate profits may contract by 7.7 per cent this year.

"While we recognise this rally may well have room to run, we believe it is beginning to look expensive relative to growth," he said.He noted that two previous bear cycles, from 1981-1985 and 1993-1998, lasted 57 and 58 months, respectively.

It has now been 17 months since the present bear market began in January last year."Those bear markets had 22 to 38 trend reversals of 5 per cent or more; we have now seen 12 since January 2008.

These comparisons suggest we are, at best, half way through this bear market," Lee said.Maybank's strategy is to go for stocks in the construction and building materials sector, as well as selected consumer and high-yield stocks.Its top picks include Resorts World, Telekom Malaysia, Berjaya Sports Toto, WCT, Kinsteel and Hock Seng Lee