Huge correction not seen for KLCI (Edge)

March was certainly a good month for stocks globally. Slumping over 20% in the first two months of the year, the S&P 500 rallied 13% in March alone, but tongues are a wagging that a correction may just be around the corner.

At home, despite the latest two-day declines, the Kuala Lumpur Composite Index (KLCI) was still up 3.6% to 907.87 as of yesterday from 876.56 early last month. It had started 2009 at 894.36 points.

Like investment guru Marc Faber expecting a correction of up to 10% in stocks, Scott Lim, the chief executive officer and chief investment officer of MIDF Amanah Asset Management Bhd, reckoned an oncoming correction was looming over the stock markets but did not expect a big correction to happen in Malaysia.

“It’s natural to expect a pull back when the rise is too quick… the US had rallied quite aggressively from its base. In Malaysia, we have gone up in line but not as much as the foreign markets.

“We are a low beta market. Foreign markets were up 20% to 30%… with even some up 40% within last month and we are up only 10% from the low. Relative to that, we are underperforming. But as a low beta market, when there is a correction, we will drop less than the other markets,” Lim said.

Notwithstanding an impending correction, Lim believed it was not the end of the bear market rally. “The market rebound is not over yet. It’s just that in any kind of rally, it’s normal to have pull backs. There is nothing to panic about,” he said.

“When a correction happens, we see some trading opportunity in this market. Should the market come down, it should be okay to take some position to trade,” he said.

Lim added that sectors that had been punished the most would likely be the sector to outperform when the rally took off again. He recommended investors to watch out for the gaming sector as well as the construction sector.

A head of research from a local research house agrees that the construction sector is definitely a sector to watch.

“Potential stocks to keep on investors’ radars when correction hits would be banks too.

“Our banking stocks have been sold down significantly. People think banks will be affected significantly. But we always lag and because we were not affected directly by the subprime (mortgage crisis in the US), our banks had time to restructure,” said the head of research.

“While non-performing loans (NPLs) will come, we do not expect it to hit our banks so badly. When NPLs are rising, we expect it to be only for a short period. Our banks are in a better position today,” he added.

The head of research believes a correction is already happening. “We hope the KLCI will hold above 880 points,” he said.

When that happened, he recommended that investors take profit and buy in again as “there’ll be plenty of opportunities to do so”.

“The volatility and liquidity in the market would enable investors to adopt a trading investment strategy,” he added.