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
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
