12 April -E Economic Update

Loan demand continues to sustain at a double-digit growth of 10.0% yoy inFebruary (8.6% in Jan), signaling the continued expansion of domestic demand.Both household and business loans growth were maintained at 11.1% and 4.2%respectively in February.

Major loan indicators moderated due to fewer working days during the ChineseNew Year holidays. Loan applications dipped 4.2% while loan approvals slowedsharply to a 11.5% growth from 41.5% in January.However, loandisbursements surged 29.5% (15.2% in Jan) on firm households and businessloans. Backed by positive consumer and business sentiments, loans growthestimates of 8-9% for this year should be within reach.

The level of non-performing loans (NPLs) rose slightly to 1.9%in February from1.7% in January. The risk-weighted capital ratio (RWCR) improved to 15.1%while core capital ratio (CCR) increased to 13.5% in February (14.8% and 13.3%respectively in Jan).

Bank Negara Malaysia is expected to raise interest rate at a measured pace andnot aggressively so as not to stymie the recovery. CIMB Research is keepingtheir overnight policy rate target of 2.50% by end-2010. The next rate move of25bp is expected either in May or July this year.


The US market was closed on Friday.Last Friday, shares extended gains further. The Nikkei hit a new 18-month high ongrowing optimism from positive data on US manufacturing and jobless claims. TheJapanese index closed 0.4% higher at 11,286.1. Regional bourses were off to a goodstart on Monday morning with shares extending gains on news that US employerscreated jobs at the fastest rate in three years for the month of March. Both Hong Kongand Singapore markets were closed last Friday to celebrate Good Friday. Trading willresume on Wednesday for Hong Kong.


Malaysia: expects another good week as itcontinues to track WallStreet’s performanc

It was another good week for Malaysia’s stockmarket as it tracked the performance onWall Street and regional markets. The Prime Minister’s launch of the New EconomicModel (NEM) last Tuesday drew mixed reactions but there were generally positive onthe tone, emphasis and direction of his keynote speech at Invest Malaysia. Last week,the KLCI gained 21 points or 1.6% to close at 1,336pts. This is a new closing high forthe year. This week, the local market is expected to continue tracking Wall Street’sperformance but with an upward bias. The NEM has some ambitious goals and willgather feedback over the next few months from public before being finalized in the 10 th Malaysia Plan (10MP) in mid-2010. As the debate on NEM goes on and there is greaterclarity as to the policies that will be formulated, we expect the market to react positivelyeven though there may be some watering down from the original goals. This is becauseexpectations on the government’s ability to execute are very low and skepticism high

1. Investors risk appetite are improving:

•We are beginning to see some investor interests returning to more risky assetslike equity. Sales of recently launched equity funds have been encouraging.

•Recall, that most retail investors have been very light on equity in their portfoliocoming into 2010; most would have moved heavily into cash & money marketfunds at start of 2009 as the financial crisis spread, and some still remain there.

•Given that we are now in the expansion phase of market cycle, investors shouldweigh more into risky assets.

•Valuations wise, global equities remain attractive vs. bonds; with P/Es trading at14x 12mths EPS, they are not rich by historical standards. Further inflation is notproblematic and sentiment, a contrarian indicator, is far from exuberant.

•But caution is still recommended, while there is no end in sight for globaleconomic growth, it should however moderate by mid 2010. Short term marketcorrections are to be expected but massive drops of -20% would be out of theordinary.

2. Earnings for companies continue to improve:
•Globally, companies have in anticipation of a prolonged recession hoarded cashin 2009. This money is now slowly being utilized to fund capex expansion, and topay higher dividends to shareholders. Now, the excess cash is used bycompanies embarking on share buy backs: this is a good sign of economicexpansion. US companies (S&P500) are expected to spend US$235bn to buyback on shares according to latest reports

•Forecast EPS growth for S&P500 companies in US: +40%, and consensusforecast expect a gain of +30% for MSCI All Country World Index, and + 32% forcorporate earning for Emerging Markets. These figures are encouraging andsupport our view.

•Given earnings are increasing its difficult to argue that equity valuations arestretched.


3. Interest rates are moving up:
•It is a question of 'when' and by how much, rather than "will it go up"? Expectrates to move up gradually and in measured amounts as it has historically.Central banks tend to cut rates aggressively, and in larger quantum, and do theopposite when raising rates.

•The People’s Bank of China has started to tighten credit in view of China’srobust growth and early inflationary pressures. But, this is not to stop growth buttom slow it down a little.

•Central banks of Malaysia raised rates recently by 25bps to 2.25% and areexpected to do so again before end of the year. CIMB forecast 2010: 2.5%, and3.25% in 2011. Brazil and India have already raised their rates, while US isexpected to do so in 3Q 2010

Australia’s RBA is likely to hike rates today from 4 to 4.25%, on back ofcontinued strong growth & pockets of inflationary pressures building up. But longterm, the continued growth of Australia which supplies commodities to Chinaremains positive. It bodes well for Australian equities and hence funds, like theCPAM Australia Equity Funds.

•However for now, inflation is still benign, and until the interest rate hikes start toaccelerate, exposure to equities would still be preferred over bonds or cash.


INVESTMENT OUTLOOK

Healthy GDP growth in 2010
Bank Negara announced its forecast GDP growth of 4.5% to 5.5% this yearunderpinned by strengthening domestic demand and an improving externalenvironment, based on the expectation of a gradual global economic recovery.

Bursa Malaysia to remain bullish
The benchmark FTSE Bursa Malaysia KLCI (FBMKLCI) Index is expected to end theyear at 1,370 points, capped by a year-end rally with a cyclical move towards suchsectors as banking and oil and gas.


Implementation of RM60b Stimulus Package
The implementation of such a large stimulus package is unprecedented in the nation’seconomic history. The RM60b stimulus package is aimed at mitigating the impact of theglobal contraction on the domestic economy, to be rolled out over two years in 2009 and2010

Of this amount, RM15 billion is fiscal injection, RM25 billion Guarantee Funds, RM10billion equity investments, RM7 billion private finance initiative (PFI) and off-budgetprojects, as well as RM3 billion in tax incentives.

Positive sector outlook in 2010
The services sector is projected to register a higher growth of 4.9% in 2010 and willremain the key contributor to overall GDP growth.

The manufacturing sector is poised for strong growth of 6.5% this year. This reflects therebound in demand for electronics and electrical products as well as improved outputgrowth for domestic-oriented industries.

The construction sector is estimated to sustain a growth rate of 4.2% in 2010, reflectingongoing implementation of projects under the stimulus package