Monday, May 22, 2006

Market Risk - Asia Pacific
Malaysia & India Examples

Global equities is slightly jittery after the slump in commodity prices and fears of higher inflationary pressures in the US. To assess market risk, one should look to the earnings of the top tier companies in each country. India deservedly got the biggest whacking as its markets also rose frothily over the last year and a half. Despite that hiccup, the Bombay Stock Exchange is still up by some 77% over the past 52 weeks. The BSE has been gaining an average of 7%-8% for the past few months, which was clearly unsustainable. Figures from IMF shows that foreign investors accounted for 6% of Indian market's turnover and about 13% of its capitalisation. That ratio has to be one of the highest in Asian markets. In Asia, the markets are not all the same. In terms of being overdone, India, China and Australia are markets which have leapt the highest and with the most froth. Hence a 5%-10% pullback is not alarming but necessary.

As for Malaysia's inherent market risk, one should look at the earnings of top tier companies being announced. YTL Power's third quarter FY06 net profit was RM217.3 million, a 21% year-on-year jump. Came in slightly better than forecasted. UMW's first quarter FY06 net profit was RM63.1 million, in line with estmates. That was a 69.2% year-on-year increase in pretax thanks to demand for tabular goods from the oil and gas sector. Star Publication's first quarter FY06 net profit was RM31.6 million, flattish but has a strong balance sheet with no debt and a cash hoard of RM447.2 million. These results are decent, not spectacular and share prices are trading in line with expectations.

The market also has some underlying value aspect with the announcement of two mega buyout deals: MMC buying Malakoff for RM9.3 billion (US$2.58 billion); Japan's Daikin buying OYL for US$2.1 billion. These two simultaneous deals could indicate that big companies are preying on "value assets" before the other big private equity buyout groups do likewise in the region. So far, the big US/European private equity buyout groups have concentrated in Japan, China and to a lesser extent in India. Maybe some key companies are sensing an imminent revaluation of good assets by these big private equity groups for Asia-Pacific assets. Bodes well for Asia-Pacific equity valuation. You heard it here first.

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