Malaysia Election Jitters to Resurface

Bursa Malaysia blue chips suffered another wave of  profit-taking correction mid last week, forcing the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) to dip below 1,600, the lowest level seen in more than two months, before staging technical rebound towards the end of the week. The sell-off was again sparked by jittery sentiments amid speculation parliament may be dissolved this month  to pave the way for the 13th general elections.

Week-on-week, the FBM KLCI eased 3.75 points, or 0.23% to 1,623.8, with DIGI.com (-12sen), TM (-25sen) and IOI Corp (-12sen) overshadowing gains on Public Bank (+34sen) and Maybank (+10sen). Average daily traded volume and value dwindled to 980.6 million shares and RM1.61 billion respectively, compared with the 1.12 billion shares and RM1.89 billion average the previous week.

Election Jitters to Resurface
The prevalent cautious mood in the market is not expected to change anytime soon in this holiday-shortened week. Institutional players could return to dabble blue chips if the benchmark index bows to another significant correction below the 1,600 mark while retailers may continue to nibble undervalued lower  liners whose share prices correlate less with any election jitters.

External weaknesses may add to domestic election uncertainty if earlier concerns about prolonged weakness in the European economy are exaggerated by the fact that the European Union’s (EU) seven-year budget will be cut by 87bn  to 960bn euros than earlier agreed 1047bn. Declining 10-year US treasury yields last week signaled reducing appetite for risky assets as investors factored in weaker growth prospects for Europe after EU leaders agreed to austerity measures last Friday for the first time in its history. Political turmoil in Spain and Italy could add to the uncertainty if situation worsens as demands for Mariano Rajoy to step down are on the rise while the return of Silvio Berlusconi could affect Italy’s economic reform process.

We are already feeling the negative vibes from a less vibrant global economy with our exports continued to underperform expectations. Trade data for December 2012 that was released last Friday showed exports for December contracted 5.8% vs. a growth expectation of 1.4%. The Electrical and Electronics product, which is the main driver, contracted both a month-on-month (-3.3%) and year-on-year basis (-12.4%), while palm oil and liquefied natural gas, the other two key exports components,  witnessed comparable yoy declines. While we are not bullish about prospects for the E&E and plantation sectors (Underweight both sectors) specifically in the short-term, the broader view is that external demand should improve in the second half of this year as key developed nations, including European countries, see improvement in their economies.

 

Now, if Europe disappoints and the rest feels the effect, our domestic activities should be ticking like a clock work to cushion the impact. So far, we have done well but the sustainability is highly dependent on the outcome of 13th GE. Thus, it is not a surprise to see a high level of caution among investors, especially those with a short-term investment horizon who are consistently trying to time their investment successfully. So, expect volatility, ride the volatility and be prepared to go long if your timing is wrong! As mentioned in the last two weekly strategy reports, a technical rebound could be in the offing post CNY (expect next week), which is an excellent opportunity to sell-on-strength for an eventual return post dissolution or postelection, depending  on risk appetite. Whatever the case, switch from overstretched defensive plays and get ready to accumulate high beta plays to ride on next wave post election overhang

 

by TA Securities

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