Hwang: 1 dec 2009 Market Strategy - What foreigners want

What foreigners want

• There had been a noticeable absence of foreign participation in the 8½-month rally on the Malaysian bourse.

• Macro valuation remains uncompelling, but there are gems to be found on the ground.

• As global equities turn more volatile, we might see a gradual tactical switch to more defensive markets like Malaysia that could also offer currency gains.

• At the top of our list of companies with low foreign shareholdings and solid fundamentals are CIMB, IJM Corporation, MRCB, SP Setia and Tenaga.

Light foreign presence. Foreign investors were conspicuously absent from the scene when the Malaysian stock market jumped 51% between mid-Mar 09 and now. This was evident in the insignificant level of trading activity by foreign investors (just 25% of trading value in Jan-Sep 09) and the persistent net portfolio investment quarterly outflows (since 3Q07) with foreign ownership standing at a five-year low.

Why the low foreign interest? For foreign investors, regional peer markets were preferred over our local bourse even before the market run-up. Then, as now, its relatively high P/E multiple coupled with pedestrian prospects (15x CY10 earnings; 17% expected growth), low market velocity (39%) and marginal market size (US$287b) mean that foreign fund managers could still choose to bypass Malaysia with little risk of portfolio underperformance.

That may change soon. But coming off from a depleted base, foreign funds could trickle back into Malaysia , especially if global equities turn increasingly volatile ahead. As the risk-reward profile tilts in the opposite direction because of stretched valuations, strategists may be tempted to make a gradual tactical switch to more defensive low-beta markets like Malaysia to diversify risks.

The prospect of an appreciating Ringgit is an added appeal for investors in search of incremental investment returns.

Focus on stock specifics. Even though Malaysian stocks remain unexciting from a broad valuation perspective, there are hidden gems to be found using a bottom-up approach. Combing through our Buy list of big and mid-cap companies, under-owned stocks – with foreign shareholdings far below their recent peaks – that could increasingly come under the investment radar of foreign investors again are CIMB (33% foreign shareholding in Jun 09), IJM Corporation (34%), MRCB (19%), SP Setia (28%) and Tenaga (11%).