Kaladher Govindan: It’s an Index Linked Rally and not Broad Based, yet.

Kaladher Govindan is the head of research with TA Securities, one of the better known broking firms in Malaysia. One of the many knowledgeable minds around with long experience in the financial markets, this young thoroughbred with a low profile talks to BUSINESS TODAY to give us his take of the stock market during these volatile times

Business Today: We have been seeing of late that Bursa really seem to be powering ahead in terms of price and valuations. Yet, there is a consensus that it is an index-linked rally. Is this a bit of a concern or would you consider this normal?

Kalandher: This rally is mainly driven by a stronger ringgit as investors rush to benefit from the “first mover advantage” on expectations that foreign portfolio inflow will increase to seize the upside potential from currency gain. Anticipation of a continued strengthening in Ringgit will draw foreign funds into the local market as investors have the potential to benefit not only from capital gain but also currency appreciation when they liquidate eventually. As most local institutional and foreign interests are usually fixated on blue chip counters due to their big cap nature and good fundamentals, an index-linked rally is not something abnormal.

BT: In recent months, Bursa has been moving ahead alone, despite the headwinds in America and Europe. What were the factors for this?

Kalandher: Fears of a double-dip in a worst case scenario and worries about prolonged weakness in the American and European economies have prompted investors to look into emerging markets that have good corporate earnings growth potential and sound economies. The build-up interest in emerging markets benefitted Malaysia as well due to its low risk profile, favourable GDP growth expectation (TA Research forecasts 8% in CY10 and 5.4% in CY11), sound earnings growth potential (TA Research forecasts 24.2% and 13.4% in CY10 and CY11 respectively) and positive outlook for the ringgit.

BT: Have foreign funds players begun to re-look Malaysia?

Kalandher: Yes, Bursa Malaysia’s trading participation data for August showed that foreigners turned net buyers by a strong margin. The same mood was reflected in Bank Negara’s statistics for that month, which showed net receipts in 2Q10 for the first time in thirteen quarters.

BT: Given the current bullish environment on Bursa right now, what are your recommended picks to the clients?

Kalandher: Many blue chips and second liners that had been recommended to clients so far had outperformed KLCI by many folds year-to-date. Some of these are stocks like CIMB, Axiata, QL Resources, Genting, KFC, RHB Capital, Unisem, KSL, Tanjung Offshore and etc. It is important to distinguish that much of the rally so far has been predominantly index-driven and not broad based, yet.

So, I would say it is wise to look out for exit opportunities in blue chips and concentrate on second and lower liners like KSL Holdings, Boustead Corporation, QL Resources, WCT, Star and so on that will play catch-up eventually.

Thematically, the stronger ringgit favours companies that sell in Ringgit while having a big chunk of their costs or borrowings in US dollar. This could benefit certain sectors that like power (Tenaga), transportations (MAS and AirAsia), Media (Star) but works against technology, glove and oil and gas sectors. As technology stocks have about 60% natural hedge in the form of US dollar-based cost components, the other two will be heavily affected.

Investors should look to bottom scoop stocks in these sectors over the next three to six months as US dollar bound to strengthen eventually as the US government induces more measures to revive the slowing economy.

BT: And what would be the common factors linking the above recommended stocks?

Kalandher: They are beneficiaries of domestic demand and strong ringgit.

BT: What are the factors, numbers or ratios you look at when dealing with stocks

Kalandher: The key factors are the management, business model, industry dynamics and growth drivers.

BT: So when you are more stock-specific, yet again you need to pick and chose from the broader market or probably take a sectorial theme, right?

Kalandher: Not necessary. In the current market a bottom up approach is needed. Top down or sectorial theme does not work well due to disparity in price movements. With share prices of many stocks running ahead of their fundamentals, it is crucial to identify and pick the undervalued gems.

BT: Would infrastructure be amongst your top favourites or would you look at some other stories in Malaysia at this point in time?

Kalandher: Well, infrastructure players like PLUS and Litrak are currently some of the favourites and have done well in terms of share price performance. With the impending announcement of projects details for the first two years of 10 Malaysia Plan in the upcoming Budget 2011 in October, we can expect interest in construction players to gain momentum. Property players, especially REITs, may also enjoy some buying interest since the government is expected to remove the withholding tax soon to be at par with Singapore and Hong Kong.

BT: Just a word on the midcap and small cap stocks, this space seems a bit quiet now. Do you think that’s a cause of concern or would you advice investors to put their money there, selectively?

Kalandher: Yes, they should as I have mentioned earlier. Malaysian economy has recovered from a recession and indications are pointing towards sustained growth in the next three to five years. Small cap stocks have the tendency to outperform the bigger players in such an environment as their small and nimble position make it possible for earnings to grow at a much faster pace.

BT: There are of course investors who want to stay for the long haul through dividends yield. What are your recommended stocks here?

Kalandher: Most banking, power and consumer stocks pay consistent dividends over the years. Among the favourites with defensive qualities are Berjaya Toto, KFC, Maybank, Public Bank, Amway, YTL Power and Telekom. Uchi Technology is a small cap technology player that has paid above normal dividends over the years as well.

BT: Foreign observers continue to say that emerging market equities in Asia are poised to extend their performance against developed nation stocks. What is your observation?

Kalandher: True. Perceptions of high risk and limited growth opportunities within developed countries have resulted in migration of funds into emerging markets that have built up their fiscal positions and vastly improved their monetary policy to withstand external shocks after the 1997 Asian financial crisis. If the current reformist measures initiated by the Malaysian premier can be executed without fear or favour from pressure groups and the economy succeeds in moving towards a truly merit based culture, we can expect foreign shareholding to rise up again from the current low twenties.

BT: Given the emerging markets scenario, is there buy on dips strategy here for Bursa or in some of our better known stocks?

Kalandher: Yes, trading at an almost 25% premium, local market valuation appeared a bit lofty now vis-à-vis the regional average. The strong surge in the index in the last two months was driven by a stronger ringgit and the momentum is expected to wane soon and the eventual correction may see some overvalued index bell weathers like Sime Darby, Petronas Dagangan, IOI Corporation and others taking a beating.

BT: Of course, Bursa can still slip down again, sharply. What are the factors that could impact such a development?

Kalandher: Strengthening of the US dollar, corporate earnings downgrade, policy measures that fell short of expectations, steep valuation vis-à-vis other markets and risk averseness.

BT: Foreign fund managers suggest a lack of reforms for pulling out of Malaysia. How should the government view this perception?

Kalandher: I think constructively with a view of improving the shortcomings. This approach is crucial as the long-term competitiveness and attractiveness of the nation depends on its ability to not only identify and fix the problems, but consistently monitoring and improving on them. The government is aware of this and the recent concepts like 1Malaysia and initiatives like the Government Transformation Programme are clear evidences that a paradigm shift is taking place at the top level to ensure that the country is not left behind other developing economies like Indonesia and Vietnam, or even Cambodia in the next 50 years of so.

BT: There are many economic uncertainties around the world. What worries you the most?

Kalandher: A deflation in the US and Europe followed by a bubble burst and hard landing of the Chinese economy.