Bursa: Likely to take a breather

Tags: Bursa Malaysia | InsiderAsia

Written by InsiderAsia
Tuesday, 29 September 2009 20:09

THE share price for Bursa Malaysia (RM8.16) has fared better than the broader market in the year-to-date, bolstered by the sharp rebound in equity markets. Going forward, sentiment — and performance — for the stock will remain closely tied to outlook for global equities.

So far, the rally in global stocks has shown remarkable resilience despite chalking up strong gains over the past six months. Strengthening investor confidence is underpinned by mounting evidence that the world is coming out of its worst recession in decades. The worst, by most yardsticks, is behind us.

Industrial output and global trade are rising month to month, boosted by government pump-priming efforts and inventory rebuilding. Consumer confidence too has improved from the lows in the fourth quarter of 2008 to the first quarter of 2009 (4Q08-1Q09).

To be sure, we are cautious that equity markets may have run ahead of underlying fundamentals. Valuations do appear stretched against forecast earnings for 2009-2010. Further upside from hereon will depend on the pace of the global economic recovery, which at this point is still somewhat unclear.

Pace of recovery still unclear
Chief among the concerns is the persistent high unemployment rates in most developed countries, including the US, euro zone and Japan. With jobs scarce and income growth muted, consumers are expected to remain tight-fisted, especially when it comes to discretionary spending. Also, there remains significant excess in production capacity around the world, which would, in turn, keep a lid on business spending in the near to medium term.

This means that private spending may not be strong enough to pick up the slack once the lifting impact from government stimulus measures and inventory rebuilding fades. Unless consumer and business spending gains traction, the rally in equity markets could start to lose momentum. Additionally, given the magnitude of recent gains, markets should undergo some correction.

Resilient markets, supported by massive liquidity
However, any pullback may turn out to be relatively shallow. This is due, primarily, to the massive liquidity pumped into the global financial system in the aftermath of last year's credit crisis.

Leaders of the G20 leading industrialised and developing economies have reaffirmed their commitment to stimulus policies, given the still fragile state of the recovery. The US Federal Reserve's latest statement suggests that interest rates will stay near zero levels for an extended period.
The search for higher yields has been, and will continue to be, the main driving force behind the current rally in equity — and commodity — markets. Improved economic outlook has whetted investors' appetite for risks, again.

Decent trading volume on Bursa
Trading volume on the local bourse has come off from the highs recorded in 2Q09, when daily market volume averaged at 1.64 billion shares, given the more cautious stance. But current levels are still pretty decent. Daily on-market trading volume averaged roughly 830 million shares in the current quarter.

Assuming daily trading volume to average at around 700-800 million shares for the rest of the year, Bursa's net profit in the second half of 2009 (2H09) is estimated to mirror the RM50.5 million recorded in the first half of the year.

The stock's valuations do look relatively high, at roughly 43 times our estimated 2009 earnings. Bear in mind though, Bursa's earnings tend to fluctuate quite a bit in tandem with investor confidence and trading volume. In other words, valuations would drop sharply if investor interest picks up. Given prevailing market conditions, further upside in the immediate future may be limited. Nevertheless, Bursa's longer-term prospects remain intact.

Strong business franchise
Bursa is a good proxy for the broader market as well as the country's economic health. It has a solid business franchise and balance sheet, with some RM440 million in available resources for use at end-June 2009.

The company's recent strategic partnership with CME Group, the world's largest and most diverse derivatives marketplace, is expected to boost its derivatives business.

Upon completion of the deal — slated for 2H2010 — all derivatives products currently traded on the Bursa Trade Derivatives will be listed and traded on the CME Globex electronic trading platform. This will, in one fell swoop, open its entire range of derivatives products to CME Group's vast global network of dealers and investors. Bursa forecasts trading volume for its derivatives products will double within three years.

Bursa will also license the Chicago Mercantile Exchange the right to use the settlement prices of its RM-denominated crude palm oil futures contract (FCPO). This will allow the future joint development and marketing for new palm oil-related products.

CME Group will take a 25% stake in the company's derivatives business for a total consideration of RM55.6 million. The purchase consideration will be settled via RM1.9 million cash and 76,427 shares in CME Group. As a result, Bursa will recognise an extraordinary gain of about RM44 million upon completion of the equity sale, targeted to be by end-2009.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.