KEY POINTS:

• Oil and gas sector in Malaysia continued its uptrend in February, which gained 6.2% month-on-month after recording a 4.1% gain in January.
• Technology sector turned out to be the worst-performing sector in February, returning a -4.2% loss.
• Auto manufacturer and plantation sectors posted marginal losses of -1.0% and -0.9% in February.
• On a year-to-date basis (as at 29 February 2012), technology sector remained top of the list with its 13.1% gain, while airlines and finance sectors remained at the bottom of the list, returning -0.9% and 2.3% respectively.
• Bank Negara Malaysia (BNM) will hold its second Monetary Policy Committee Meeting on 9 March 2012.
• BNM is likely to adopt a “wait-and-see” approach in the coming meeting and maintain the Overnight Policy Rate unchanged at 3.0%.

CHART 1:

Oil and Gas – Up with Higher Oil Price and Major Merger

Oil and gas sector in Malaysia continued its uptrend in February, gaining 6.2% month-on-month after recording a 4.1% gain in January. Global oil prices surged in February as tensions between the Middle East and the West grew over the nuclear issues in Iran. Chart 2 shows the WTI Crude Oil Futures surged to USD109.77 per barrel on 24 February 2012 after Iran cut its exports to UK and France. The 8.3% gain in crude oil price over one month, to some extent, has drawn investors’ attention to the oil and gas stocks.

CHART 2:

On the local front, investors are now eyeing on the merger between SapuraCrest and Kencana. The merger of these two largest listed oil and gas players (by assets) in Malaysia will create the largest integrated oil and gas services provider in Malaysia. As the merged entity will be listed on Bursa Malaysia by the middle of March, we believe this major merger has provided the key catalyst to support investors’ sentiment over the oil and gas sector.

As the oil and gas sector is one of the National Key Economic Areas (NKEAs) and has been contributing approximately 20% of GDP, maintaining and enhancing the oil production is crucial for Malaysia. Given this, the government has initiated 12 Entry Point Projects (EPPs) under the Economic Transformation Programme. The EPPs includes rejuvenating existing fields through enhanced oil recovery, developing marginal oilfields, building regional oil storage and trading hubs as well as intensifying exploration activities. With the development of marginal oilfields and enhanced oil recovery to continue to be the key focus, more oil and gas contracts are expected to be awarded this year. Hence, the local oil and gas sector is likely to fare better in 2012 as compared with 2011.

Technology, Auto Manufacturer and Plantation – Turned Upside-Down

Technology, auto manufacturer, and plantation sectors were the top 3 performing sectors in January, which returned 18.2%, 11.6% and 6.9% respectively. In February, the technology sector turned out to be the worst-performing sector by delivering a -4.2% loss. This was within our expectation as we mentioned in last month’s review (Which Malaysian Sector Gained 18.2% In Jan 2012?) that the double-digits gain in the technology sector could be short-lived, as the corporate earnings of technology sector could be significantly impacted by the potential slowdown in major economies such as US, Europe and China.

On the other hand, auto manufacturer and plantation sectors posted marginal losses of -1.0% and -0.9% in February. The loss in the auto manufacturer sector was mainly due to the share price of DRB-Hicom declining 10.6% in one month.

Overall, on a year-to-date basis (as at 29 February 2012), the technology sector remained top of the list with its 13.1% gain, followed by oil and gas and auto manufacturer sectors which returned 10.5% respectively. Airlines and finance sectors remained at the bottom of the list, returning -0.9% and 2.3% respectively (refer to Chart 3).

CHART 3:

What’s Next?

Bank Negara Malaysia (BNM) will hold its second Monetary Policy Committee Meeting on 9 March 2012.

Instead of fighting inflationary pressure, monetary policy is now more focused on supporting economic growth. As such, we believe that BNM is likely to adopt a “wait-and-see” approach in the coming meeting and will maintain the Overnight Policy Rate unchanged at 3.0%. In addition, as inflationary pressure continues to subside after peaking at 3.5% in June last year, this will further support BNM’s case to keep the OPR unchanged. BNM is likely to cut the OPR by 25 to 50 basis points in 2H 2012 if economic growth suffers a significant slowdown. We estimate the GDP growth for 2012 to range between 4.0% - 4.5%.

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