He expected sentiment to be positive till March next year, before investors took profit and revisited valuations and earnings of local companies which might come in below  expectations.

“I don’t foresee a major correction (in the US stock market). I think Malaysia, to a large extent, will probably see its performance around the negative 10% range (in the second quarter of 2010).

“The other reason I am not bullish on Bursa (Malaysia Securities), apart from its high plantation weighting, is that most blue chips in Malaysia are trading at full valuations,” Lin told The Edge Financial Daily.

For now, the general sentiment is that world markets have run ahead of economic fundamentals as investors price in a macro-economic recovery, which in turn dictates companies’ earnings and  valuations.

The big picture, going forward, hinges largely on the dynamics of the US economy and the outlook for large emerging markets like China.
US equities may swing in both ways in the next six months, according to Lin, who foresees a 10% upside or downside in the world’s largest economy’s stock market.

“Looking at the macro data, particularly, consumption and consumer spending, besides, household spending and debt, it does not suggest that the recovery for the US is going to be strong,” said the fund manager who oversees RM37 billion worth of assets for Great Eastern whose funds are invested across Malaysia and Singapore.

Lin is cautious about commodities. This is because prices for items like crude oil and palm oil, which are deemed to have run ahead of economic fundamentals, may come under downward pressure next year against a  backdrop of lower demand for these resources.

Palm oil rates tend to move in tandem with crude oil prices as costlier hydrocarbon energy prompts demand for palm oil as feedstock for production of biodiesel, a cheaper alternative.

But Lin believes the correlation was less now by virtue of palm oil being used for food production, hence,  prices of palm oil are expected to be more resilient than crude oil prices.

“But that doesn’t mean that I am extremely bullish on palm oil. If you ask me, commmodities will be an asset class that will depreciate.

“Demand scenario, I think, will again be disappointing for commodities. I actually urge investors to be very careful for commodities next year, “ said Lin who foresees a smaller decline in palm oil rates compared to crude oil prices during the first half of next year.

Meanwhile, RHB Research Institute Sdn Bhd said inflation and asset reflation themes would be key highlights in 2010.  

According to its head of research Lim Chee Sing, inflation and asset reflation will gradually emerge as a catalyst for greater market performance against a landscape of ample liquidity, low interest rates and the anticipation of a weakening US dollar.

“These will likely translate into rising commodity and asset prices when the economic upcycle becomes firmly established. This would imply better prospects for the oil and gas, plantation, and property sectors.

“However, the potential risk of countries implementing ‘exit strategies’ or policy tightening implies greater volatility in world financial markets,” Lim wrote in RHB’s latest market outlook and strategy report.

The research house expects the FBM KLCI to trade at 1,260 points by end of this year before rising to 1,345 points by the end of 2010.

Last Friday, the FBM KLCI fell 0.17% or 2.1 points to finish at 1,206.25, for a year-to-date gain of 37.58%.

Commodities also declined. Crude oil for November delivery at the New York Mercantile Exchange fell US$1.13 (RM3.93) to US$69.69 a barrel, while Malaysian palm oil for the same month dipped RM83 to RM2,048 a tonne. Spot prices for gold were down US$1.75 to US$997.45 an ounce.

This article appeared in The Edge Financial Daily, October 5, 2009.