Malaysia Bursa: Still Early to Bottom Fish?

Aggravated  foreign  selling  on  index-linked  blue-chip  heavyweights  pressured  the  FTSE Bursa Malaysia KLCI (FBM KLCI) sharply lower last week, sliding down for a full closure of the  post-elections  gap-up  prior  to  a  mild  technical rebound  ahead  of  the  weekend.  Key triggers for the foreign selling were sell-offs in neighbouring markets due to reversal of fund flows back to the United States on speculations theFederal Reserve would reduce stimulus next  month,  and  Bank  Negara  Malaysia's  downgrade  of the  2013  gross  domestic  product (GDP) growth forecast to between 4.5 and 5 per centfrom 5 to 6 per cent previously.


below: FBM KLCI Weekly chart 

fbm klci weekly chart

For the week, the FBM KLCI tumbled 67.17 points, or3.76 per cent, to 1,721.07, with CIMB (-50 sen), Maybank (-53 sen),  Axiata (-39 sen), Tenaga (-42 sen) and Genting Bhd (-46 sen) contributing almost half of the index's loss. Average daily traded volume and value increased to 2.31 billion shares and RM2.84 billion, comparedwith the 2.07 billion shares and RM1.79 billion, respectively, the previous week, as foreign selling on index heavyweights, especially core banking stocks, featured prominently.

Contagion Fear
Last  week's  correction  was  a  tad too  fast  than  expected,  no  thanks  to the  sharp  fall  in the
rupee and rupiah, which rekindled the painful memories of the 1997 Asian financial crisis that started rolling after the swift devaluation ofbaht, and Malaysia's lower than expected second quarter GDP of 4.3 per cent.

The fear of another contagion effect was not misplaced as the sharp 70 per cent quarter-on quarter plunge in the country's current account surplus to RM2.6 billion startled many. No doubt, the near 7.4 per cent year-to-date correction in the ringgit against the US dollar has made  imports  more  expensive  while  exports  suffered  from  lower  demand  for  electronic products  and  weaker  commodity  prices.  While  the  nation's  strong  foreign  reserves  of US$137.9  billion  (RM456.45  billion),  low  foreign  currency  debts  and  healthy  financial system provide some comfort against recurrence of another financial crisis, it is paramount that external trade improves with economic recoveryseen in the US and Europe to cushion slower demand from China and to stimulate demand for ringgit.

Otherwise,  the  central  bank  has  to  increase  burning its  foreign  reserves  in  defending  the
ringgit  or  start  raising  the  interest  rate  the  check  the  outflows,  especially  portfolio investments.   Thankfully  our  economy  is  still  flush with  liquidity  for  the  central  bank  to support  ringgit  by  keep  mopping  up  the  currency.  It can  be  deduced  that  the  amount  of
excess liquidity mopped up stood at RM289.3bn in the first half of August 2013.

 

While  speculations  of  a  potential  hike  in  the  overnight  policy  rate  (OPR)  could  destabilise
share  prices  of  interest-sensitive  stocks  and  affect  certain  sectors,  it  is  our  belief  that  the
policy  rate  should  rise  above  the  perceived  neutral rate  of  four  per  cent  to  cause  any significant dent on internal demand. While no hike in OPR is expected for the rest of this year in  view  of  the  weak  external  sector,  the  sheer  speculation  of  such  possibility  will  have dampening  effect  on  certain  sectors  like  property,  motor  vehicles  and  consumer-related
stocks.

Still Early to Bottom Fish
So, if anyone out there is thinking about bottom fishing, it is still too early until we know for sure  what  is  in  the  Fed  policymakers'  mind  come  September  17  and  18,  when  they  meet again (notwithstanding the amount of cut, eventual  total cessation of quantitative easing by mid-2014 is inevitable unless the US economy dives again). In the interim period, investors can put their trading skills to the test!

 

by TA Secruties

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