Since our July Stock Market reading, the KLCI has been rising approx 120 points to the current level of 1260 points. This was a little improvement for the second half of 2009 and falls within our expectation of no large price increases during the period. However, the KLCI did not drop substantially during the period in spite of a substantial overvaluation as measured against our model calculation.
As at July, the KLCI was actually overvalued by 36.7%, and 26% as at end of October 2009 as shown in the chart below:
The market overvaluation shown above is arrived at based on actual economic data for 2009 and an assumption of a moderate Malaysian GDP growth of 4.0% for 2010.
Since the world economic recovery is not expected to be robust, the above estimates for the Malaysian economy are believed to be reasonable.
The current market scenario characterized by a steep climb after the recent market bottom may be interpreted as classic case of a bear attempt to scale the previous height, which will eventually fail as expected in this Malaysian Market Outlook for 2010. This is more so in the face of the current gross market overvaluation.
To illustrate this point, a comparative chart showing the actual KLCI and the Model KLCI is shown above. In the current scenario, the KLCI has dropped steeply to its bottom in October 2008, but has since climbed steeply to its present level of 1260 points, an increase of 26% over a period of 14 months. The chart derived from the model equation has risen much less.
In past situations, such a scenrio almost always led to severe market correction. This should have happened in the second half of 2009, but it didn’t . It is possible that the KLCI do not move with free market forces since most of the shares that affect the index are held by government institutions.
Nevertheless, sooner or later free market forces will exert more influence as any form of deliberate price support will become more costly. Therefore, it is our view that this severe correction is overdue, and it may happen soon or at the latest before the end of 2010.
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