Market Conditions Remain Unfavourable for FBMKLCI

bnv The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) suffered a setback last week after strong October U.S. jobs data fueled expectations the US Federal Reserve will raise interest rates at its December policy meeting. Oil & gas, banking and plantation stocks re the main drags on the index, but a sharp overnight Wall Street correction sparked by weak crude oil prices was offset by local funds bargain hunting ahead of the weekend.

For the week, the FBM KLCI retraced 26.79 points, or 1.6% to close at 1,658.91, with Genting Berhad (-48sen), Sime Darby (-31sen), CIMB (-14sen), IOI Corp (-19sen) and Public Bank (-22sen) representing more than half of the index’s loss. Average daily traded volume and value stabilized at 2.2 billion shares and RM2billion, compared with the 2.5 billion shares and RM2.2 billion average respectively the previous week.

The third quarter 2015 (3Q15) GDP announcement came and went without much excitement as the 4.7% YoY growth was largely within market expectations. That is the slowest growth since 2Q13 as the negative effects on consumption and private investment were compounded by weak commodity prices and challenging external demand. Malaysia is no exception as our closest neighbours Singapore (1.4% YoY) and Indonesia (4.7% YoY) also announced weaker growth for the quarter. Thailand is expected to reflect a similar trend when its 3Q15 GDP is announced later today.

However, the continued deceleration in growth to 4.7% YoY in 3Q15 vs. 4.9% YoY in 2Q15 points to challenging period ahead if the turnaround in net exports and private investment are not sustainable amidst weakening private consumption. Malaysia’s economy is expected to sustain the 4.7% YoY expansion in the 4Q15, leading to a full year growth of 5%. Next year’s growth is expected to cool off to 4.6%, within the government’s official target range of 4% and 5%, on the back of weaker external demand and softer commodity prices.Nonetheless, these factors could contribute to deteriorating current account surplus, exert pressure on government’s fiscal deficit target and affect investor sentiment.

While the continued strength in the US labour market provides some hope that a stronger US economy can mitigate the impact of any rate hike in the US, most likely next month, and cushion the negative effects on external demand from softer growth prospects out of China and Europe, which is facing added pressure from terrorists’ attack in Paris, it is not expected to dissuade foreign fund managers from exiting our capital market.

Given the still high foreign shareholding in Malaysian Government Securities (around 45%) ananticipation of further weakening in ringgit as we approach mid-December, as the US Fed announces its final policy decision for the year, investors should continue to expect greater degree of volatility in the market. The FBMKLCI should stabilise after the policy meeting, even if there is a hike in the US interest rate in December, as the market should have factored in such possibility prior to that and anticipate the Fed to pause for a while (potentially until March 2016) before further tightening. However, as the rout in crude oil prices could continue next year with excess supply from Iran flooding the market amid cooling demand, any positive market sentiment could be swayed easily.

With so much uncertainty anticipate further deterioration in the benchmark index this week. However, there is a window of trading opportunity for the brave hearted to accumulate on price weakness within the next one month and sell-on-strength early next year.

As for economic data this week, Malaysia’s October CPI that will be released this Friday is expected to show moderation (consensus forecast is 2.3%) compared to September (2.6% YoY). Foreign reserves data on the same day could shed some light on funds flow behaviour. On the US front, forward indicators like housing starts, building permits and leading index this week should provide ome clue about the health of the US economy and the Fed’s next policy decision.


by TA Securities

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