KUCHING: The Malaysian market remains the focus of foreign investors as the nation confounds the skeptics by continuing to deliver on its ambitious Economic Transformation Programme (ETP). Industry sources and analysts concurred that 2011 would be a positive year as the economy chugged along with a recuperating property market as well as bullish stock market.

Deutsche Bank AG in its prognosis for 2011 pointed out that with the transformation underway, in the Asean context, Malaysia was increasingly being recognised by the global markets. Contributory factors to the positive upswing included food and fuel subsidies that were gradually being abolished as well as the steps being taken to put in place a more competitive business model.

It pointed out that the removal of subsidies would ultimately lead to a much needed change of mindset and curb the dependency of companies on the domestic market.

Moreover, the country was witnessing a hive of activities in the form of Entry Point Projects (EPP) as well as other massive projects resulting from the ETP. Local contractors have been busy announcing contract awards at a regular pace the recent one being RM36 billion Mass Rapid Transit (MRT) project approved by the cabinet.

Malaysians were confident again evident in the strong rebound in the retail market that was projected to grow between 10 and 12 per cent year-on-year (y-o-y) in 2011. The nation also posted the biggest y-o-y jump in mergers and acquisitions in Asia in 2010 coupled with a buoyant property market. Analysts concurred that this was not a defensive market and pointed out that collectively, the structural initiatives undertaken over the past five years were now beginning to pay off.

These intiatives included the aggressive restructuring of most government linked companies (GLCs), rapid offshore expansion by Malaysian companies, market liberalisation measures, abolishment of the Foreign Investment Committee (FIC) guidelines in selected sectors as well as the listings of vibrant companies such as Petronas Chemicals, MMHE and Maxis.

Analysts pointed out that the initiatives have raised earnings valatility but in turn, earnings growth had also strengthened materially.

Earnings from offshore entities that were largely Asean based now accounted for 32 per cent of total earnings versus just 10 per cent in 2005 based on their portfolio of stocks.

“By 2012 estimates I foresee this number to climb to 36 per cent. This is a significant change and I believe that the market has yet to fully appreciate. This is why Malaysia’s earnings growth of 26 per cent in 2011E is just slightly behind that of Indonesia at 27 per cent,” pointed out an analyst.

“The Malaysian market offers a strong growth proposition combined with a dividend yield of 3.5 per cent, above the regional average,” he added.

Industry sources revealed that the Indonesian market had been the blue eyed boy for foreign funds during the past two years, the gap between Malaysia and Indonesia should start to narrow now. They opined that they were witnessing some of the same funds parlaying similar bets in Malaysia just as they did two years ago in Indonesia.

They concurred that the Malaysia market was delivering on positive structural changes, offering superior growth in 2011 thus gaining greater exposure to the Asean growth foorprint. Malaysia was enjoying strong inflows into the equity market (Average Daily Trading year-to-date stood at US$830 million versus US$480 million in 2H2010).

Foreign shareholding was also climbing (22 per cent as at December 2010) and industry sources estimated that by June, FTSE should upgrade Malaysia from “Secondary Emerging” to “Advanced Emerging” that would drive passive inflows through positive sentiments.

While one research house forecasted a 14 per cent upside to the market over the next 12 months reaching the 1,790 level, pegging the market at 15.5 times price earnings ratio (PER) 2012, others were more conservative.

According to OSK Research Sdn Bhd head of Research Chris Eng, “It is possible for the index to hit the 1,790 region but we are maintaining our KLCI fair value of 1,648 for now.”

ECM Libra Capital Sdn Bhd head of Research Bernard Ching said, “We see the market well supported up to 1,650 based on corporate earnings growth momentum. Having said that, the current market is still being buoyed by net equity inflows, positive news flor from ETP implementation as well as merger and acquisition activities.

“If such liquidity-fuelled rally persists, we believe the market could even touch the 1,870 mark. However, investors should be mindful of external events such as escalation of the Eurozone sovereign debt crisis which could trigger another round of risk aversion,” he added.

RAM Ratings group chief economist Dr Yeah Kim Leng concurred with an upside on the index, “there is concern that this huge surge in global liquidity would find it’s way into the emerging markets and substancial amounts will flow into the equity market causing price escalation.

“However there is a risk that the stock market especially in the Asean region would overheat because of the huge global liquidity created by loose monetary policy and quantative easing in the US. Given the market does overheat, then the government will step in to moderate the negative short term impact,” he pointed out.

“We have to be wary of equity price bubbles and absorbance going forward, Investors must be careful to spot sharp corrections especially when there is a reversal in capital flows,” he warned

Analysts’ favourites included CIMB, Petronas Chemicals, KL Kepong, AMMB, IJM Corp, AirAsia, SP Setia, Dayang, Sapura Crest, Allianz Insurance, Dialog and Century Logistics.