Friday, August 9, 2013

Alliance Research bullish on construction, O&G, glove sectors


Posted on 8 August 2013 - 05:36am
sunbiz@thesundaily.com 
Alliance Research Sdn Bhd head Bernard Ching

PETALING JAYA (Aug 8, 2013): The confluence of a depreciating ringgit, fiscal discipline, monetary tightening and normalisation of government bond yields will have significant impact on Malaysian equities going forward, said Alliance Research Sdn Bhd head Bernard Ching (pix), who sees limited upside potential for the FBM KLCI.

"Our year-end 2013 FBM KLCI target of 1,850 points implies only a 3.7% upside. Going into the second quarter results season in August, we see limited catalyst," he said in a strategy report yesterday.

Given the limited upside potential, Ching sees investors taking a defensive stance, but warned of the downside risk for exposure to the typical dividend plays in the real estate investment trust (REIT) and telecommunication sectors due to impending normalisation of risk-free rate.

"We continue to like the construction, oil and gas (O&G) and glove sectors which we believe are the most resilient in terms of topline growth given continued government and quasi-government capital expenditure commitment in the construction and O&G space," he said.

"As for the glove sector, we like the resilient export demand and an improving economic environment in the advanced economies with further underpin our bullish view.

"We also selectively like stocks such as Tenaga Nasional Bhd (TNB) which will benefit from the government's measures to address fiscal imbalances via subsidy rationalisation," he added.

Alliance Research's top picks are SapuraKencana Petroleum Bhd, Perisai Petroleum Teknologi Bhd, Gamuda Bhd, Ahmad Zaki Resources Bhd, Kossan Rubber Industries Bhd and TNB.

Ching noted that following the US Federal Reserve chairman Ben Bernanke's testimony before the US Congress on May 22 of the impending tapering of its US$85 billion bond buying programme in the coming months, investors' sentiment was further dampened when Fitch Ratings recently revised its outlook for Malaysia to "negative" from "stable" due to weakening public finances.

To recap, Malaysia has run a budget deficit for the last 15 years while federal government debt-to-GDP ratio has rose from 51.5% in 2011 to 53.3% in 2012, which is just shy of the 55% threshold.

As such, the federal government would need to address such fiscal imbalances to avoid any rating downgrade. For 2013, the federal government plans to reduce the budget deficit from 4.5% in 2012 to 4%.

"On the flip side, we believe the federal government may now be more committed towards fiscal discipline going forward in order to avoid a potential rating downgrade.

"We believe the federal government will rein in operating expenditure and raise revenue while keeping its capital expenditure intact. Besides fiscal measures, we also expect monetary tightening to take hold to address rising household debts," he said.

Ching reckons that these fiscal and monetary tightening measures may be introduced in the fourth quarter of this year or early 2014 post Umno Supreme Council election on Oct 5 and Umno general assembly on Dec 2.

"Fiscal discipline will likely provide a boost to the utilities sector as it is the main beneficiary of impending electricity tariff hike but negative to other sectors due to higher cost of doing business (higher fuel cost, GST, sin tax hike), while discretionary consumer spending will also take a hit as households tighten their belts.

"Monetary tightening will largely be negative on the banking sector as well as other sectors whose revenue growth is dependent on consumer credit expansion such as automotive, consumer and property," he said.

Meanwhile, Ching said the depreciation of ringgit will generally be positive to exporters in the chemicals, glove, plantation and technology sectors, but negative to importers in the automotive, aviation and media sectors.

"Since May 22, 2013, the ringgit has depreciated by 7.3% to RM3.25 per US dollar as of Aug 2. While we expect the ringgit to be volatile in the near term due to the hot money flow, we expect the ringgit to regain some strength in the fourth quarter of 2013 and to close the year-end at around 3.13 per US dollar," he added.

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