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Thursday, June 9, 2011

Key risks for 2011 (CIMB)

Risk of a double dip
Although our economics team believes that the risk of a double dip of the Malaysian economy is extremely low, double-dip risks are still high for the western developed economies. Double-dip risk appears highest in Europe and the US at an unchanged 30%. Although equity markets appear to be decoupling, this could unravel if Wall Street falls into a tailspin, as it did in 2008.

Political risks
Political noise may have subsided this year but could easily rachet up once general elections are called. Elections in Malaysia are typically hotly contested and the stakes have never been higher. Although general elections are not due till 2Q13, the better-than-expected performance by the National Front in the recent Sarawak state elections should be a confidence booster. We note that the Opposition won eight out of the last 15 by-elections.

Policy risks
Although the Najib administration has promised to avoid the policy flip-flops that marred the Abdullah Badawi administration, imposition of unpopular policies would draw similar reactions. The 2010 Budget re-imposition of the real property gains tax of just 5% met with hue and cry. Likewise, the award of the sports betting licence in 2010 and its subsequent cancellation caused confusion and reinforced the perception that there is still a tendency for policy flip-flops.

Execution risks
Malaysia is well known for coming out with strong proposals and positive policy measures. However, it is also well known for its poor execution and implementation skills. The question repeatedly asked in relation to the GTP and ETP is the authorities’ ability to deliver what they promise. We are comforted that the first-year results of GTP have been encouraging and progress on ETP has so far exceeded expectations.

Corporate earnings risks
Corporate earnings expectations and actual results are very important in determining the direction of the stockmarket. But analysts’ expectations may have run ahead of fundamentals. In the last 5-6 quarters, the results performances have been mixed, which contrasts with the massive positive surprises in 2009.

Foreign funds flow
Foreign funds were net sellers of Malaysia for a long time after the Mar 2008 general elections. They only turned net buyers in 2009 when global markets rebounded and again in 2H10 as a result of renewed interest in emerging markets. A reversal of that trend would be negative though the risk is mitigated by Malaysia’s large pension funds which can cushion selldowns. Also, foreign funds’ weightings in Malaysia remain at depressed levels compared with the pre-global financial crisis levels.

Volatility here to stay?
Volatility is likely to remain a feature of markets in 2011. Adverse news from Europe, the US or China could send shockwaves through global markets. The blackswan events of the Arab spring, the earthquake in Japan and the subsequent tsunami were shocking. But as long as the major markets do not go into a vicious spiral that triggers deterioration in fundamentals, the selldowns should be buying opportunities.

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