FBMKLCI to Consolidate on Profit Taking Pressure

Share prices on Bursa Malaysia extended gains for a second week. The FBMKLCI breached the 1,600 psychological level last week as investors reacted positively to  Special Economic Committee's measures to stabilize the stock market with the reactivation of ValueCap with funds of up to RM20bn to shore up the local stock market.

 

Meanwhile, global market sentiment also got a boost from the U.S. central bank’s decision to hold the interest rates steady last week but gains were capped by renewed concerns about the health of the global economy, in particular China. Hence, the renewed concern on global economic growth and its eventual impact on the domestic economy will continue dampen sentiments and cap further upside in near term.

Week-on-week, the FBM KLCI rose 65.85 points, or 4.11 percent last week to 1,669.45 with Tenaga (+RM1.00), Public Bank (+76sen), Digi.Com (+44sen) and Axiata (+34sen) accounting for about half of the index’s rise. Average daily traded volume and value improved further to 2.18 billion shares and RM2.59 billion, compared to the 2.06 billi shares and RM1.90 billion respectively the previous week, as trading focused on heavyweight blue chips.

 

The phenomenal performance of FBMKLCI in the first two days of the week post news flow about reactivation of ValueCap appears overdone bearing in mind the objective of the fund is to support undervalued stocks and not push up the index. Besides, any purchase decision will take place in stages upon receiving the money in future. Considering the allocation oy amounted to about 1.6% of Bursa Malaysia’s total market capitalization, it is unlikely to meddle with market forces and waste on its bullets, unless there is an attractive bargain. At the moment FBMKLCI is not cheap, trading at a consensus CY16 price-to-earnings ratio of 14.8x versus most regional markets’ 12x to 13x.

In view of the anticipated strength in the US dollar in the months ahead, not only because of the Fed’s likely increase in interest rates but also due to its safe haven status amid looming economic slowdown in China and persistent weakness in commodity prices that will stoke greater concerns about deflationary pressures globally, probably in the 1H2016. Thus, even if the buying support from local institutional funds could help the benchmark index break pass 1,700 level momentarily in 2015, stay tuned, as the volatility in the equity market is here to stay, and embrace for lower lows in 2016. 

 

On a positive note, the current economic uncertainty and deflationary concerns could influence the Fed to postpone its monetary tightening exercise and even introduce another round of quantitative easing (QE4) in 2016, if deflationary pressures really bite into economic growth as consumers delay their purchase decisions.

 

This period could coincide with the flooding of crude oil supply in 1H16 when Iran is expected to turn on its oil tap for the rest of the world without any interference. Thus, there is ample room for ValueCap to bottom fish in 2016 than exhausting its ammunition on starting block.


As for this week, selling pressures are expected to set in as investors take the opportunity to lock in profits before going for Hari Raya Haji holiday this Thursday
, which could be extended to the following to coincide with the weekends. On the local front, the release of foreign reserves figures tomorrow and CPI the following day will be closely watched. The US will be releasing important economic indicators like its fi estimate of second quarter 2015 GDP, personal consumption, core Personal Consumption Expenditure, PMI and home sales n

 

As for this week, selling pressures are expected to set in as investors take the pportunity to lock in profits before going for Hari Raya Haji holiday this Thursday, hich could be extended to the following to coincide with the weekends. On the local ront, the release of foreign reserves figures tomorrow and CPI the following day will be losely watched. The US will be releasing important economic indicators like its fi estimate of second quarter 2015 GDP, personal consumption, core Personal consumption Expenditure, PMI and home sales numbers this week that will provide valid clues on its next monetary policy decision.

 

by TA Securities

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