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Market Focus
(023849) 13 Oct 2010

Approaching a peak

Profit-taking over the horizon

Index-linked stocks continued to be ramped up as funds, including foreign funds spurred by potential currency gains
due to a rising ringgit against the US dollar, flowed into the market. As always, sporadic plays were seen in
numerous small caps and lower liners which boosted trading volume. Market sentiment was buoyant in line with
global bullish bias which was mainly liquidity driven. Over the immediate horizon, the Budget 2011 will be presented
this Friday but we do not expect any fresh impact as most of the big tickets projects have already been announced
and the need to balance a wide account deficit pre-empts further costly projects. Some of our recently
recommended stocks performed well such as AZRB, KimLun, GuanChong, Delloyds, Unimech, Padini and Bonia
as funds flow into mid-cap stocks under the relatively bullish market conditions.

Meanwhile, market participants worldwide have been conditioned to believe that the central banks of the world will
lean towards quantitative easing or extend the “easy money” policy to support prices than seeing market deflate
which signifies negative growth. Like we mentioned last month, the US may embark on another round of
quantitative easing as its unemployment position has yet to improve significantly and also to prevent price deflation.
Japan is ahead of the curve by cutting its interest rates to near-zero which triggered a mini-rally in the Asian
markets. The rate cut was followed by a USD61b stimulus package aimed at boosting the flagging Japanese
economy. Further such measures from other countries may have the unintended effect of causing price inflation
and in the process push up stock markets worldwide.

Despite trading in an overbought situation, the FBMKLCI continued to confound market pundits who thought prices
were too high. As the trend is in motion, it is expected to stay in play until a reversal occurs to turn it around. Market
sentiment appears to be held up by bullish expectations of more quantitative easing while the local bourse is
boosted by the upcoming Budget 2011 and details roll-out of the ETP. The bottom-line is that the market is
expecting more money to be spent on various infrastructure projects and had largely imputed the perceived impact
into the market as most of the projects are already public knowledge like the RM36b MRT projects. Thus, the
eventual announcements of these two events may trigger some profit-taking activities due to the market’s tendency
to “buy on rumour and sell on news”.

Market appears fairly valued

A stronger ringgit aided the rise of the market as some foreign funds flowed in to position themselves for potential
foreign exchange gains. Coupled with some local institutional support, the FBMKLCI surged to its year high of
1493.29. Market PER valuation for FY2011 is at around 16x backed by an estimated eps growth of 13.0% appears
to be fairly valued. Hence, the upside is also fairly limited as the early birds would be looking for exit opportunities to
lock in profits. Coupled with the huge gains made in the past few months, we are advocating reducing positions at
this juncture especially on market strength as a correction is expected to kick in to cool down the overbought
situation and also provide the market an opportunity to build a stronger base. As we believe that the market is
approaching a peak, it would be prudent for players to reduce positions and wait for better entry levels.

The information contained in this report was prepared from data believed to be reliable but we have not independently verified such data and we do not make any representation or
warranty as to the accuracy or completeness of the information. This report is general in nature and has been prepared for information purposes only. It does not have regard to any
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