Bursa Malaysia’s FBM KLCI is likely to prove defensive in the face of rising external risks and reach 1,900 points by middle of next year, UBS Investment Research says.
“The ongoing economic and political reform story, a stable domestic institutional fund base and relatively low foreign portfolio levels are key mitigating factors should the external environment deteriorate further,” said UBS Head of Malaysia Research Chris Oh in the firm’s latest Malaysia Market Strategy report today.
UBS is positive on cyclical stocks.
“Our preferred picks are cyclical stocks — banks, property, construction, and oil and gas — but we are tactically balancing our preferred picks list with stable cash flow, high-yielding stocks to position for a period of reduced investor risk appetite,” he said.
UBS also remains positive on Malaysia’s ability to implement reform policy and hence, its key top-down strategy would be to advise investors to be weighted in economically-sensitive sectors and companies that would benefit from positive reform measures and infrastructure spending.
Oh said that for the second half of 2011, large capitalised stocks were forecast to lead the rally only because of the relative liquidity they provide and the low weightings of foreign investors in larger stocks.
“We believe we are at the nascent stage of a potential market rally, with only foreign interest gaining momentum, while retail participation remains limited,” he said.
He said that should the implementation of the reform agenda continue to gain momentum, UBS expected foreign portfolio inflows to accelerate given the current low foreign ownership levels relative to Malaysia’s recent history.
Oh added that new listings of larger stocks such as Maxis, Petronas Chemical and Malaysia Marine and Heavy Engineering Holdings, and the focus on improving liquidity of the larger government-linked companies would gradually increase Malaysia’s weighting in the benchmark indices, which could ncrease foreign investors’ interest in the market. — Bernama