KLCI falls on cancellation of mega rail projects

By MARK RAO / Graphic By TMR

Malaysia’s equity market moved deeper into a bearish phase as investors grow increasingly risk-averse to uncertainties arising from the domestic scene and developments abroad.

The move by the federal government to scrap mega rail projects saw broad-based selling by investors with the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) falling some 56 points, or 3.18%, to 1,719.28 points yesterday, after hitting a low of 1,709.51 in intraday trade.

Over the past month, the local exchange has shed some 151 points against a backdrop of key infrastructure projects and fiscal policies coming under review as the new administration looks to make good on its campaign promises.

“The bulk of the selling yesterday was by foreign funds that are taking a risk-off approach to increased uncertainties in the markets here and abroad. The FBM KLCI has turned bearish and the index has lost almost 50% of the gains it made from the 1,503 point level in August 2015, when the uptrend began,” said a chartist with a local brokerage.

The selling was triggered by the move by the federal government to scrap the Kuala Lumpur-Singapore high-speed rail and the third line of the mass rapid transit project, while the East Coast Rail Line remains under review.

Uncertainty in Italy regarding the formation of its government has also created heightened risk aversion among investors, causing a broad-based sell-off across global markets and negatively impacting emerging markets (EMs) including Malaysia ahead of possible rise in interest rates in the US next month.

Rakuten Trade Sdn Bhd head of research Kenny Yee Shen Pin said the performance of the FBM KLCI is the result of the cumulative impact from developments in the US, Europe and Malaysia.

“We see a lot of volatility in US markets under the Trump administration and Europe is faced with high levels of debt,” Yee told The Malaysian Reserve (TMR) when contacted. “We see many large-scale projects in Malaysia come under review or scrapped altogether, which has dampened sentiment locally.”

He said foreign investors are highly sensitive to volatility and are selling ahead of negative news flows, thus resulting in the broad-based sell-off noted in Malaysia’s equity market.

In this scenario, the FBM KLCI is expected to trade between 1,700 and 1,715 with psychological support at 1,700 and immediate resistance at 1,730, he said.

Counters exposed to the infrastructure and construction sectors, as well as banking stocks, took the brunt of the selling.

Dutch Lady Milk Industries Bhd, Gamuda Bhd and Public Bank Bhd were the top three losers for the day, while Malayan Banking Bhd, Tenaga Nasional Bhd and Petroliam Nasional Bhd-linked counters were also down.

Yee thinks the sell-off was a knee-jerk reaction to recent developments as the fundamentals of the market remain intact, while affected companies retain strong orderbooks and sound financial standing.

CIMB Investment Bank Bhd head of Malaysia research and regional head of agribusiness research Ivy Ng said underwhelming corporate results in the current results season has also dampened sentiment locally.

“With external concerns coupled with local developments, investors are looking to take profit from Malaysian equities and reduce their exposure,” she told TMR when contacted.

The increased risk aversion has had a negative impact on EMs as assets in these markets are risk-based and highly sensitive to volatility.

“Italian political unrest remains in focus and has risk assets quivering, which usually translates into regional losses,” said Oanda Corp head of trading for Asia Pacific Stephen Innes.

This has kept investors at bay from Malaysia’s capital and currency markets, which saw the ringgit traded at RM3.98 to RM3.99 against the US dollar yesterday.

“The local currency will continue to be in the no-trade zone for foreign investors who are showing little appetite for Malaysian bond and equities prior to the Italian meltdown,” Innes said. “It is even more unlikely now for investors to do so with the risk aversion gripping the market.”

The chartist at a local brokerage said the 1,708 point level is now a critical support level for traders, but added that the market may rebound today after holding steady above that level yesterday.

“If the heavy selling persists and the 1,708 level breaks, the FBM KLCI could go lower to hit the 1,698 point level. If this fails as well, then the market will try to test 1,650 point level,” he added.