By DASHVEENJIT KAUR / Pic By MUHD AMIN NAHARUL
Geopolitical events remain one of the key factors in determining investors’ sentiment in the local equity market this year, market observers said.
In general, analysts are positive on more private sector-driven economy in Malaysia over the mid to long term, given the government’s reform initiatives.
However, the short-term outlook for Malaysia would be relatively volatile due to the lack of fresh catalysts and other external factors such as the unsettling Sino-US trade dispute, slowdown in China economic growth, Brexit uncertainty, as well as the tightening global liquidity.
Analysts believe while the worst seems to be over, the moderating trend is expected to continue into 2019 for the local equity market.
MIDF Investment Bank Bhd said in a recent research note that the stock market’s movement for 2019 will be influenced by various internal and external factors such as trajectories of global trade, threat of protectionism, global financial stability, geopolitical risks, commodities prices, stable labour market, and improved business and consumer sentiments.
“Moderation in global trade seen in 2018 is expected to continue in 2019,” it said.
With global equities suggesting that a recession is looming, MIDF reckons that a recession is on the cards for the US. “Considering possibilities from the standpoint of two predictors of recession — the flattening yield curve and unemployment rate reaching a trough — recession is in the air for the US.
“Being the largest economy in the world, if the US sneezes, the rest of the world catches a cold,” it said, adding that for the case of Malaysia, recession looks dubious, but a slowdown is possible.
From the local perspective, Malaysia’s equity market as represented by the FTSE Bursa Malaysia KLCI (FBM KLCI) marked more than 0.2% of year-to-date losses, while over the last 52 weeks, it suffered 8% losses in share price.
As of yesterday, the benchmark index was trading at 1,685.30, 11% lower than its 52-week high of 1,895.18 achieved on April 19, 2018.
Market capitalisation year on- year had reduced to RM1.72 billion from RM1.92 billion posted a year ago.
Heightened global uncertainties, which subsequently led to risk-off sentiment, was one of the main factors causing the significant sell-off in the local stock market.
On a positive note, research firms have long bet on FBM KLCI’s defensive trait.
“The FBM KLCI is a defensive equity market barometer.
“In other words, its price movements are relatively less volatile in comparison to its peers. In our reckoning, there are two underlying reasons to explain this trait — namely, earnings volatility and investors’ behaviour,” MIDF said.
In terms of investors’ behaviour, MIDF noted that the defensive trait of the benchmark index can also be explained by the opposing behaviours of local market participants, particularly between local institutions and foreign investors.
According to MIDF, the opposing behaviours have arguably generated a countervailing effect on the price volatility of FBM KLCI.
“Going forward, we can expect the opposing behaviours to continue to contribute to the defensiveness of the local market,” the research arm said.
A quick check on Bloomberg showed that the earnings of FBM KLCI were empirically least volatile compared to its peers in the South-East Asian region, such as the Jakarta Composite Index and Singapore’s Straits Times Index, as well as in comparison to the earnings variation of broader indices like the MSCI Emerging Market Index and MSCI Asia Pacific Index.
Meanwhile, in terms of where investors should place their money, Fundsupermart Malaysia opines that for investors who have been investing into passive funds such as a KLCI-linked fund, they might want to reconsider their strategy for 2019.
“Reason being, firstly, we see unexciting earnings growth ahead for the benchmark index — mainly due to challenging prospect for sectors like plantations, telco and industrial, which in total account for more than 30% in the benchmark index,” it said.