'KL stocks may fall 10pc before rebounding'

MALAYSIA'S benchmark stock index may fall 10 per cent in coming months from last week’s peak before forming a base at 980 for the next “leg up,” driven by a revival in corporate earnings, said AmResearch Sdn Bhd.

The market is “negotiating a mid-cycle correction,” Benny Chew, an analyst at AmResearch, said in a report today. “The pullback may not be too severe as long as the underlying economy and corporate earnings remain on a recovery path.”

The Kuala Lumpur Composite Index, up 20 per cent this year, has fallen 4 per cent from the June 15 peak of 1,091.17. The gauge will rebound because government efforts to boost spending will reinvigorate the economy, aiding builders, steelmakers and property developers, the report said.Investors should buy so-called “reflation trades” in industries such as oil and gas, plantations, property and steel, Chew said.

His top ten picks include builders such as IJM Corp, WCT Bhd and Gamuda Bhd and steelmaker Ann Joo Resources Bhd Property group IJM Land Bhd, oil palm grower IOI Corp and lender Bumiputra-Commerce Holdings Bhd are also on the list.

Prime Minister Datuk Seri Najib Tun Razak, who took office on April 3, has announced stimulus plans valued at RM67 billion (US$19 billion) to restore economic growth as the nation heads for its first recession in a decade.

AmResearch raised the “fair value” of Malaysia’s index to 1,190 next year from 1,050, saying infrastructure spending will boost corporate earnings. Profits will grow 17 per cent in 2010 after shrinking 8 per cent this year, the report said.

“Analysts have historically tended to underestimate the strength of an upturn in corporate earnings,” Chew said. “This will be the catalyst for the next leg up.” - Bloomberg