Slowing earnings or too high expectationS?

(From Malaysian Business)

THE market has corrected about 4.5% from its one-year high of 940 points in the last few months. While the fall may seem little, the fact is that the breadth of the market is poor indeed, with many second-liners and third-liners languishing and showing no signs of recovery. This has disappointed most retail investors, who have largely kept to the sidelines.

Even the expected traditional pre- or post-Chinese New Year rally did not materialise this time around. Many investors blame the weaker-than- expected stock market performance on the weaker set of 4Q04 results of most listed companies.

The downgrading of Malaysian stocks by Deutsche Bank was a major sentiment dampener, especially for foreign investors who could have been taken aback by the negative report, especially since our market had never really performed, in the first place.

In Deutsche Bank's Strategy Alert report dated March 1, 2005, it said the reported 4Q04 corporate earnings were disappointing. Of its 25-company coverage, 50% of the results were within expectations, 38% below and only 12% above.

Coupled with the slower pace of execution in the restructuring of government-linked companies (GLCs) and unwelcome internal distractions that have slowed the pace of political reforms in the country, the foreign broker has called for a switch from Malaysia to Thailand.

In this article, we look at the reviews of the 4Q04 results by research houses and attempt to get a better feel of how the market is likely to fare in the next few months.

CORPORATE RESULTS REVIEW

AmSecurities Research says there were not many positive surprises in the 4Q04 earnings reporting season. Out of their stock universe, only 10 companies (or 12.5% vs 14% in 3Q04) performed better than consensus expectations.

In terms of the percentage of results within expectations, this rose slightly to 58% vis-will-vis 56% previously, leaving the proportion of companies with weaker-than-expected …