OSK 2010 INVESTMENT STRATEGY: MALAYSIA EQUITY 1 MALAYSIA REVITALIZED Executive Summary

A Surprising 2009 Rebound. While we had expected the economy and the stock market to recover in 2H2009 after the “Great Recession” was countered by the "Great Stimulus", the speed and quantum of recovery took most by surprise as the KLCI rebounded some 45% from its lows in March. Nonetheless, on a regional basis, the KLCI was still the third worst performer, only ahead of Korea and Japan as other markets offered greater growth potential and also rebounded off a lower base. 1Q2009 was the worst in terms of GDP contraction as well as corporate earnings reported, although the GDP has recovered q-o-q while corporate earnings strongly outperformed expectations in 2Q2009. A bumpy recovery. With both the US services sector and China’s manufacturing sector currently in expansion mode, the worst is behind us. However, the road to recovery is lined with potholes as US Government debt has surged to 60-year highs while the US consumer remains indebted as unemployment continues to creep up. The challenge in 2010 is therefore to clean up the finance sector’s balance sheet and gradually reduce budget deficits without disrupting the anaemic economic recovery.   Liquidity driven market. While economic growth remains at an anaemic 3.1% globally, equity and commodity markets are a different story as many equity markets have returned to pre-Lehman levels by late 2009. We continue to see liquidity lending strength to these markets just as historic low interest rates are keeping markets up despite the lofty valuations. However, optimism on future earnings appear unrealistic, especially with consensus estimates for most East Asia index earnings growth of more than 20% for 2010. Nonetheless, until the 2010 corporate results come in (earliest in April) and surer signs of interest rate hikes materialise, we are optimistic that markets can climb further in 1H2010.   1Malaysia Revitalized. In addition to the liquidity-driven rally and an improving economy, we believe Malaysia has its own unique drivers in the form of PM Datuk Seri Najib Tun Razak and his new administration. Despite initial skepticism, the new Government has since being sworn in on April 2009, made efforts to enhance Malaysia’s attractiveness as a destination for foreign investment through a raft of liberalization measures and appears set on inculcating a performance-based culture. Efforts have also been made to enhance ties with key countries such as Singapore, Saudi Arabia and China on the foreign front while on the domestic front, the focus has been on poverty eradication and subsidy reduction in moving towards becoming a High Income nation.   Revising upwards KLCI fair value to 1345 points. Given the improving economic outlook, we are raising our 2010 GDP growth forecast from 2.5% to 4.0%. We also see the liquidity driven rally continuing for most of 1H2010, with foreign interest returning to Malaysia as efforts to revitalize corporate Malaysia gain traction. It is on this basis that we raise our 2010 KLCI fair value from 1265 points to 1345 by applying a higher PER of 17x. However, we caution that the market may experience a contraction in 2H2010 and fall back to a more reasonable 16x PER, or 1265 points.   Three-pronged investment strategy. Given a revitalized Malaysia, we recommend a three-pronged investment strategy, namely: Buy companies that will benefit from growing ties with China, Singapore and Saudi Arabia; Buy laggard blue chip counters, especially GLCs that will benefit from an increasingly performance based culture; Buy domestic players that stand to gain from infrastructure development to eradicate poverty and enhance unity.   More Important Note