Economic and Market Outlook 2011.(Industry overview)

CAN the domestic economy and in tandem the local bourse sustain their uptrend from last year? LAST YEAR WAS A GOOD YEAR for stock market investors. The local equity market surged approximately 18% to 1,499.88 from 1,272.78 as at end- December last year (see Figure 1). This remarkable performance was pretty much in line with the regional and global equity markets, which saw similarly strong rallies. The strong performance can also be attributed to the fast turnaround of the underlying local economy.

Recall that the domestic economy expanded by the whopping rates of 10.1% and 8.9% on a year-on-year (YoY) basis in 1Q10 and 2Q10 respectively, even though it slowed down to 5.3% in 3Q10. According to local research house MIMB Research, the 4Q10 real Gross Domestic Product (GDP) is expected to range between 3.7% and 5.7%, making the full year 2010 real GDP to potentially grow within the range of 7.0%-7.5%. The research house, however, says that the slower 4Q economic growth could extend to the first half of 2011.

Optimism reigns, still room for upside Beyond the likely slower economic growth, another local research house - RHB Research Institute - still believes that there is room for the local equity market to trend higher in 2011 on the back of the scenario of a no 'double-dip' recession for the global economy. The resilient growth of the local economy, which it projects to normalise to 5.0% in 2011, will still translate into a sustained corporate earnings growth of approximately 16% for 2011, it says (despite a nonetheless big decline from almost 40% in 2010). As such, the research house believes that this scenario will still create new shareholder value for investors.

MIMB Research agrees. It reckons that the underlying up-trend of the local market FBMKLCI main barometer index is likely to be sustained until 1Q2011 as per its 177-week Time Cycle Study (see Figure 2). Hence, it too believes that it's time for investors to position themselves for the final up-leg before seeing a meaningful market correction after 1Q2011.

Fundamentally, RHB Research Institute believes that the major events and potential catalysts for the …