The FTSE Bursa Malaysia KLCI is expected to trade between 1,475 and 1,650 points next year, representing up to 18 times
its 2011 earnings.

MIDF Research Senior Vice President and Head of Research Department Zulkifli Hamzah said this projection was based on the 10-year average of its monthly high price earnings ratio of 18 times with a corresponding earnings growth of 15.8 per cent.

'We are setting a 12-month base case KLCI target of 1,650 points for 2011 and the index can easily overshoot the target in a liquidity market.

'In such an extreme bullish scenario, the implicit KLCI target is 1,935 points. However, this is not supported by the bottom-up valuation,' he said at media briefing on the country's economic outlook for 2011 today.

Based on KLCI's close of 1,506.1 on Nov 21, the target of 1,650 represents a 9.6 per cent upside.

The market barometer is expected to continue its uptrend as long as the United States keeps its interest rate at current levels and oil prices stay below US$110 per barrel.

Zulkifli said there were several short-term factors that would keep sentiments positive for the key index next year.

One factor was MIDF's estimate that Malaysia's gross domestic product would grow 5.3 per cent in 2011. Its previous projection was 5.8 per cent growth.

'This conservative view is driven by the less favourable base effects, unwinding of policy stimulus and more subdued growth in several major export markets.

'However, we believe the economy will not fall into technical recession,' Zulkifli said.

He said corporate earnings growth which is expected to accelerate to 15.8 per cent compared to 14 per cent this year with strong growth in banks, plantation and construction sectors, would also be an important factor that would bode well for the index outlook.

Besides, he said, more corporate actions through mergers and acquisitions and more large capital initial public offerings, rally in crude oil and commodity prices, expected foreign buying, more capital-intensive projects of the Economic Transformation Programme, and election factor would also contribute to the sentiments next year.

Zulkifli said the inflow of foreign funds to Malaysian equity was expected increase next year.

FTSE's reclassification of Malaysia as an Advanced Emerging Market effective June 2011 is expected to attract foreign funds tracking FTSE indices which are estimated to be more than US$3 trillion.

'As long as Malaysia continues to make the right moves such as climbing up the FTSE classification ladder, foreign funds will be flowing in.

'And factors that may draw foreign funds next year are commodity rally, continued strength of the ringgit and state and general elections,' he said.

As at December 2010, foreign shareholding in Malaysian equity is still low at 21.7 per cent.

'This year, foreign funds came into Malaysia but most went to Malaysian government securities than to equities.

'We expect the shift to take place when the reclassifying comes into effect that will result into foreign investors coming in,' Zulkifli said. -- Bernama