THE end of the year is usually a quiet time among brokers. Many money managers are on leave and the year-end festive period is a downtime among the promoters of equities. But not this year.

OSK Investment Bank Bhd's head of research Chris Eng says his schedule is full, as the brokerage has lined up presentations right through the normal time for merriment as investor interest shows no signs of abating.

Usually we don't have presentations at the end of December but this time we do,'' he says.

Chris Eng says his schedule is full for the year-end.

It is understandable why that has been the case this time around. Stocks on Bursa Malaysia are rallying and there will certainly be smiles all around the trading desks in town.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) has reached a new peak this year of 1,528 on Nov 10 and the value of transactions are up and interest in equities is similarly on a high.

As traders look forward to their bumper bonus, and investors their better returns in any strong market year, the catalyst for the surge in the market surely has caught a few by surprise.

In fact, it would have taken a brave person to call a record year when 2010 rolled on as a number of drivers for the market throughout this year were at their embryonic stage.

It's been above our expectations,'' says Eng as to how the stock market has performed this year.

Eng recalls that at the start of 2010, OSK had a 2010 year-end KLCI target of 1,345 points. The FBM KLCI at the beginning of the year was at 1,275. OSK made two upward revisions to its year-end target in March and October this year.

But he points out that at the beginning of 2010, the house's FBM KLCI target for 2011 was 1,580 points, the highest in town. Its current target is 1,648, which he says now is below average.

The consensus has caught up with us,'' he says.

The question now is whether 2011 would be an equally good year and judging by the early responses, many are expecting the stock market to chart new highs but are remaining cautiously optimistic in their calls.

Next year is going to be tough in predicting where things are going,'' says said MIMB Investment Bank's head of research Chan Ken Yew.

The year 2010 was a tale of two halves, between the expectation and reality, 2011 too may end up that way in reverse.

The challenges for the stock market, which has benefited from stronger economic and corporate earnings growth, which Chan and others do speak about, are the reverse of its earlier strength as the year winds to a close.

The liquidity rush from the announced second round of quantitative easing in the United States was an adrenaline rush for equities but its latent negativity is not being underestimated by most stock pickers.

Furthermore, the low base effect has certainly given domestic economic growth numbers a huge boost but that, along with the last vestiges of the pump-priming efforts by the Government in response to the 2009 recession would have run its course as 2011 rolls on.

For the moment, those risks are just conjecture and are not deterring investors from picking the next winners in the market.

The economic lift

When the economy entered 2010, nobody was certain where things would end up. Talk of a double dip recession was prevalent, despite improvements being registered as a result of the massive amount of fiscal stimulus globally and the ultra-loose monetary policies throughout the world.

That nerviness about prospects was best exhibited by the low official projections in economic growth at the start of this year which was between 2% and 3% for 2010.

But in the first quarter of this year, before the official number for the first quarter was revealed in May this year, official projections for the full year were aggressively raised. Monthly economic data were already pointing towards a sharp improvement.

When the first quarter GDP number of 10.1% was announced, most investors were pleasantly surprised and that added to a growing exuberance that had enveloped the stock market.

In fact the better economic environment had not only lifted sentiment but actual performance of listed companies and the earnings there reported.

An analyst said his brokerage at the start of the year had expected corporate earnings to rise by 15% in 2010 but as the year winds to a close, the stocks under its coverage would probably show an earnings growth of 26%.

Checks with a number of other brokers showed the same results; most did not think corporate earnings would rise as strongly as it has so far this year.

But precedence for a big jump in earnings has been set many a time after a recession or weak growth period.

Corporate earnings jumped by 36% in 1999 after the Asian Financial Crisis after contracting by 20% in 1998. Similarly in 2002, corporate earnings accelerated by 24%, from just 3% in 2001.

Corporate earnings normally correlate closely with economic activity,'' says Affin investment Bank Bhd economist Alan Tan.

The liquidity boost and the ringgit's rise

Although corporate earnings have lifted stocks in the first part of the year, the spark to markets in Asia, in particular emerging markets, has been the huge amount of liquidity seeking higher returns.

Analysts have said the super loose monetary policies by countries, especially the United States and in the developed world, have resulted in a massive infusion of cash and adding to already large amounts of cash swishing around was the potential second round of quantitative easing worth up to US$600bil by the United States.

That money has found its way into a number of the country's large and liquid blue chip stocks, which in turn has lifted the FBM KLCI up nearly 18% this year.

The liquidity rush has also flowed into the ringgit and other emerging currencies. Hot money has flowed into government bonds; foreign interest today is at a record high, resulting in a steep appreciation of the ringgit.

The ringgit, which is up just over 9% against the dollar this year, has given foreign investors a double gain as the equity and currency returns for foreign investors buying Malaysian stocks have yielded a return of 29% this year.

Foreign participation in the Malaysian stock market has seen six (months of) consecutive net inflow of foreign funds, but the momentum appears to be decelerating,'' said Credit Suisse in a note recently.

The decline in net foreign buying, which has fallen from RM4.4bil since September to RM900mil in November is not dissuading brokers from raising their KLCI targets for next year though.

One head of research says that after underestimating the performance of the market this year, he will not be doing that for 2011.

Although markets operate quite cyclically, meaning they tend to underperform their comparative peers after a strong year, he thinks the case for Malaysia is different.

Money flow into stocks from foreign buyers should continue and the structural changes in the economy via the transformation programmes would be enough to sway doubters that Malaysia is still the place to invest.

That view was also echoed by Credit Suisse. In the same note about Malaysian equities next year, Credit Suisse was positive over the outlook of Malaysian stocks for next year. They believe the stock market will be driven by liquidity, supported by a robust economy, rising commodity prices, stronger ringgit, pump-priming before the general election, a boost from the Economic Transformation Programme, and rising cross-border investments from Singapore.

We expect interest rates to remain low in Malaysia, it adds.

Should interest in stock remain robust, expect much of the money to go where it has been all along for the year.

Chan, who tracks the valuation gap, says the divide between large caps and small caps are growing in the current market upswing, which suggests interest among investors still remain solidly in the country's largest stocks.

The gap is converging when compared with the mid cap stocks but it's not happening for small caps,'' he says.

While sentiment is still rosy today, analysts have said that risks to the stock market rally are nonetheless growing.

Risks for 2011

For one, corporate earnings growth, which was stellar in 2010, would come off in terms of growth to the teen-levels. Projected earnings growth for 2010 would be around the mid 20 %region, depending on the stocks covered by the broker.

First quarter earnings growth was the strongest and that was followed by the second quarter and the third quarter. That growth patterns ties in with the economy which showed its strongest growth in the first quarter and its weakest in the third,'' says an analyst.

The economy is projected to grow between 5% and 6% next year.

While talk of a double dip recession can still be heard among the bears of the market, analysts don't think that will happen as economies from around the world have shown their willingness to avert one.

No more clear action was taken by the United States to support its economy and generate growth when it announced the second round of quantitative easing and that was followed up by the extension of US$858bil in tax cuts to spur job creation.

The first half of next year is going to be great as momentum is strong while sentiment remains positive. I expect the current M&A theme to continue while several ETP projects announcement may be fast-tracked in the run up to the widely expected general election,'' says ECM Libra Investment Bank Bhd research head Bernard Ching.

On the other hand, the market outlook for the second half is difficult to gauge at this point in time as much will depend on external events. While GDP growth is expected to pick up again in the second half, there remains concern over the spillover effect of Eurozone debt crisis, credit tightening in China, potential currency and trade wars, geopolitical risk from the Korean Peninsula, and inflationary pressure in emerging Asia.

Apart from those concerns raised by Ching, the reversal of quantitative easing and the resultant improvement in the US economy that has some worried.

My fear is that the inflows into Malaysian equities will reverse once the QE2 stops. That would also happen once the US economy show signs it's getting healthier and job numbers are up,'' says a head of research.

Another factor that has brokers worried is the relative high valuations of Malaysian stocks.

Based on estimates on Bloomberg, stocks that constitute the FBM KLCI is trading at 17.15 times earnings. Forward PE ratio for next year is 14.14 times.

Chan believes the peak for the market would be a PE ratio of 17 times and the market certainly breached that when the FBM KLCI touched a record high in November.

Some brokers think the appetite among investors, particularly foreign, would not deplete even if valuations remain high, at least for the first half of the year.

One foreign analyst says low interest rates around the world would still aid the liquidity driven boom and money would continue to come into South-East Asia (SEA).

Valuations in South-East Asia are rich but money finds SEA to be better than China or elsewhere,'' he says.

Ching adds that market momentum is strong and so is sentiment.

There is foreign net equity inflow and there will be interest in equities from the thematic and M&A plays,'' says Ching.

On stock picks, Ching is recommending taking trading positions and riding the momentum of the market. He thinks the liquid big caps will have a further 10% to 20% upside in the first half.