KUALA LUMPUR - Stocks in Malaysia are expected to edge upwards in the months ahead due to favourable economic conditions as US-led foreign investors selectively snap up blue-chips, analysts said.

Lee Soo Kai, economist with local brokerage OSK Research Bhd, believes the Kuala Lumpur Stock Exchange Composite Index could hit 760 points by the end of the year. It closed Friday at 681.57.

Lee attributed the strong market outlook to a low interest rate regime, abundant liquidity and modest economic recovery spurred by a recent stimulus package.

"Economic catalysts that drove the South Korea and Thailand markets the past year are showing up in Malaysia," he said.

"Low interest rates, ample liquidity and easy credit will drive the Malaysian equity market as they did for South Korea and Thailand."

Shift in focus

Discounting critics who have predicted the market surge would not last long, Lee said macro ingredients were in place for Malaysia to keep "the party" going.

The bourse has rallied nine percent from a month ago and seven percent since the RM7.3 billion (US$1.92 billion) economic stimulus package was announced on May 21.

Lee said there was general agreement in the market that the government's stimulus package reflected a shift in focus to building strong domestic demand and channeling funds to under-utilized small and medium industries.

"This change in perception is precisely the catalyst needed to put the idle liquidity into work in the equity market," he said.

Lee said he had adopted a cautious view of the economic outlook late last year but was now confident that the negative impact from the Iraq war and the Severe Acute Respiratory Syndrome outbreak had subsided.

"We, however, still believe that economic numbers (coming) out in the second and third quarters will continue to be disappointing owing to the hangover from the war and Sars," he said.

"Nonetheless, the sky is always darkest before dawn and we believe that a large part of the bad news has already been discounted by investors."

Deputy Prime Minister Abdullah Ahmad Badawi said Friday: "Although, at one stage, there was uncertainty over our economic performance due to the effects of the war in Iraq and Sars, I believe the second quarter will register positive growth."

Gan Kim Khoon, head of AM Research, a local brokerage company, said disappointing first-quarter earnings coupled with sharp share price rises for some stocks had resulted in more "take profit" opportunities than "buy" recommendations.

Run-up sustainable

Investors, he said, should identify "laggards" that are also backed by strong fundamentals with cheap valuations.

Such stocks included Malayan Banking, Maxis Communications and Hong Leong Bank, he said.

Another analyst with a local brokerage said the pick-up in the US economy was drawing US investor interest to the underweight Malaysian bourse.

"Foreign funds, particularly from the US are eyeing blue-chips stocks in the banking, auto, telecommunication and gaming companies," he said.

"This run-up is sustainable. It is not being just boosted by the stimulus package. The economic fundamentals are sound and with Sars waning and US economic recovery, we will see a long rally." - AFP