Since my first article on these series dated April this year, the Malaysian Stock Market has been rising moderately with the KLCI climbing from 965 points at end of April 2009 to the current level of 1140 points.
The increase in the KLCI happened more or less in tandem with overseas indices such as the Doe Jones Industrial Average(DJIA), Nikkei, and the benchmark indices of Korea, China, Taiwan and Singapore.
With these increases, the KLCI has become even more overvalued as measured by the deviation between the model and the actual KLCI levels. As indicated in the chart below, the market is now at least 17% overvalued, indicating a fair value of KLCI at 974 points only.
The 17% market overvaluation shown in the above table takes into account the latest DJIA and exchange rate data, as well as the GDP forecast at -4.2% and CPI estimate at 1.6% for 2009; and the GDP growth forecast of 2.8% for year 2010 as estimated by MIER.
In such an environment of GDP contraction and an expected slow economic growth in the near future, it would be extremely difficult for the market to sustain the existing level. Large price increases that would bring the market to the pre-crisis level are not realistic and therefore are not expected.
Further, should the actual data for the year 2010 GDP growth and inflation rate be lower than the MIER estimate, the the current market overvaluation would actually be higher than the 17% estimated above. This could lead to a large drop in the KLCI to below the 974 level in the second half of this year.
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