The Kuala Lumpur Composite Index hit an intra-day low of 1,040.4 points before some buying support emerged to enable it to close off the low. It ended the day down 1.28% or 13.53 points to 1,045.97 points, which was below the crucial 1,050-point level.

Maybank Investment Bank Equity Research said the market rally had stretched valuations to levels unjustified by earnings growth, since an economic and corporate earnings recovery is likely to be anaemic.

It said market valuations at 15.6 times and 14.2 times 2009 and 2010 estimated earnings were expensive for the growth (-8.4%, +9.8% respectively) and the market is expecting an unrealistically rapid recovery.

A report by The World Bank added more gloom to the market after it warned that the world is entering an era of slower growth that would require tighter and more effective oversight of the financial system.

In its report Global Development Finance 2009: Charting a Global Recovery, it said global growth was expected to be negative, with an expected 2.9% contraction of global gross domestic product (GDP) in 2009 instead of its previous forecast of a 1.7% decline.

The breadth of the market was negative, with the very active counters in the red. There were 602 losers and 116 gainers. Turnover was 1.24 billion shares valued at RM1.31 billion.

Among the major losers were Sime Darby Bhd, Tenaga Nasional Bhd, Bumiputra-Commerce Holdings Bhd and Malayan Banking Bhd (Maybank). The sharp fall in the commodities market, including oil and crude palm oil (CPO) also dampened sentiment.

Crude oil fell US$1.33 (RM4.72) per barrel to US$68.22 as at 8pm yesterday, while CPO futures tumbled RM128 per tonne to RM2,158 and RM2,157 for August and September.

European markets fell in early trade but most of the key Asian markets, which closed earlier, were higher.

Hong Kong’s Hang Seng Index added 0.77% to 18,059.55 points as new lending activities in China picked up pace driven by infrastructure projects, while the Shanghai Composite Index added 0.55% to 2,896.30 points and Taiwan’s Taiex Index jumped 1.77% to 6,341.21 points.

Japan’s Nikkei 225 gained 0.41% to 9,826.27 points, South Korea’s Kospi added 1.18% to 1,399.71 points, but the Singapore Straits Times Index fell 0.28% to 2,266.92 points.

Maybank Research said the Malaysian market did not compare well against regional peers, especially Indonesia and Thailand, which have lower price to earnings (P/E) and higher 2010 earnings growth.

“From a top down perspective, we do not expect much more upside from here, but to characterise us as bears would be inaccurate, as we have 33 buys against 29 sells,” it said in its strategy report yesterday

It said the market, whose PE was under 12 times in early 2009, it did appear cheap relative to its 10-year historical average of 15.8 times.

The current 15.6 times PE though, is just below this historical average and is just 6% from the 16.7 times mid-point of the previous cycle’s valuation, it said.

“Corporate earnings growth, at negative to single digit in 2009-10, suggests signs of a weak recovery, but market valuation, being near its mid-cycle value, is expecting and pricing in a V-shaped recovery in 2010. We see little evidence for this, and we believe markets have moved too far, too fast,” it said.

Maybank Research said by end-2009, with a prospective growth of around 9.8% in 2010, it believed a fair valuation for the market would be 13 to 14 times PE, with the KLCI at 970-1,040.

Inter-Pacific Research Sdn Bhd head Anthony Dass said the next support level for the KLCI was 1,020 points, adding that the local stock market was overstretched and that it was time for a correction.

“Our local stock market is now very expensive after the recent rally and the earnings growth does not justify the valuations,” he said.

On the global economy, Dass said recovery was not going to be a sharp V-shape and that he forecast a 1% decline this year and 2.1% growth in 2010.

On the World Bank warning of a deeper recession this year, Dass said negative reports as such could prompt funds to flow back to the US, as it was perceived as a “safe haven”.

“Only after that foreign funds will start flowing back into the developing economies. This is a trend we have seen from the past,” he said.

At Bursa Malaysia, Sime Darby fell 15 sen to RM6.85, Tenaga and BCHB lost 20 sen each to RM7.35 and RM9.05, while Maybank and RHB Capital Bhd lost 10 sen each to RM5.60 and RM4.10.

Other losers included British American Tobacco (M) Bhd, PacificMas Bhd, Nestle (M) Bhd, Tanjong plc, LPI Capital Bhd and Berjaya Land Bhd.

Gainers included Malaysian Pacific Industries Bhd (up 30 sen to RM5.30), Warisan TC Holdings Bhd (added 15 sen to RM2), Aliran Ihsan Resources Bhd (up 13 sen to RM1.03) and LFE Corporation Bhd (up 10.5 sen to 28 sen).

KNM Group Bhd was the most actively traded counter yesterday, with 110.3 million shares done. The stock fell 5.5 sen to 81 sen.

Other actively traded stocks yesterday included UEM Land Holdings Bhd, Compugates Holdings Bhd, Tebrau Teguh Bhd, Scomi Group Bhd and Saag Consolidated (M) Bhd.