We foresee positive domestic factors for Malaysia such as the robust economic recovery, country?s transformation program, government measures to improve the market?s investability and 10th Malaysia Plan. We expect the KLCI to resume its uptrend in 2H2010 and achieve 1,448 points end-2010. We like beneficiaries (banks: Maybank, RHB Capital; Tenaga, AirAsia) of the economic recovery, contractors (Gamuda, IJM Corp, MRCB) on acceleration of the infrastructure project rollout and selected stock-specific plays (PLUS, AirAsia, Jobstreet).

A wave of changes. Since Datuk Seri Najib Tun Razak became the new Prime Minister, we have seen a wave of changes. The significant policy changes include repealing the guidelines that cover the acquisition of equity stakes, mergers and takeovers, and easing bumiputera requirements for listings and property transactions. We view such changes positively.

More changes on the way. The Prime Minister has indicated that there will be more measures to ?

1. transform the government into a more effective, advanced safe and accountable entity (government transformation program: GTP);
2. revitalize and spur growth in key economic sectors to achieve high-income status (economic transformation program: ETP); and
3. improve investability of the Malaysian market.

Positive drivers
Successful implementation of transformation. In our view, the program, approach and ideas/initiatives inspire optimism. If implemented successfully, these programs could help fundamentally transform the country and attract major investments to stimulate growth.
10th MP boost. The 10th Malaysia Plan (10MP) outlines the macroeconomic framework and strategies for 2011-2015. The government intends to facilitate greater private sector participation to help drive growth over the next 5 years. Several contracts have since been awarded where contractors are responsible for the financing ? easing the pressure on the government?s finances. We understand there has been a pick-up in the number of construction and infrastructure tenders. Although competition remains keen, we see more positive project news flow for the sector in the coming months.

Government land sales. Apart from the construction and infrastructure projects, we expect to see government land sales/privatization deals in 2010. Government linked companies (GLCs) such as MRCB, majority owned by the Employees Provident Fund (EPF), and players with stronger balance sheets could be strong contenders for such projects.

Further strength in economic recovery. DBS Economic Team expects strong 2010 GDP growth of 8% y-o-y, boosted by the manufacturing sector. This bodes well for banks, as positive sentiment would drive demand for consumer and business loans, Tenaga and aviation-related plays such as AirAsia and Malaysia Airports. We also believe it could boost demand for big-ticket items (such as property; our sector picks: SP Setia, E&O, Bolton).

With the domestic economic conditions improving and price pressures being subdued, there is little need for Bank Negara Malaysia to tighten monetary policy in the near term. The Economic Team looks for another 25bps increase in the overnight policy rate (OPR) to 3.0% by year-end.
Improve investability. We expect further government selldown of government linked company (GLC) stakes, privatizations and M&A to increase free float, liquidity and valuations. This together should help attract foreign interest ? which remains at relatively low levels (c.21%).

Risks
Delays in execution of transformation program or roll-out of infrastructure projects. There will definitely be major challenges and resistance. Implementation is a key test for the government and economic transformation. Increase in risk aversion. Despite the positive domestic factors, the market will likely be weighed down in the near term by risk aversion arising from the European debt crisis. We expect the KLCI to resume its uptrend in 2H2010 and achieve 1,448 points (14x 2011 earnings) end-2010.