Is the equity market heading to the weakest finish since 2008 financial crisis?

The FBM KLCI is under duress due to the never ending political concerns beside the existing trade war fears


THE local equity main index could register the biggest index percentage decline in more than 10 years due to the global economic uncertainties and retaliatory actions by Beijing after the US endorsed laws to support anti-government protests in Hong Kong.

Political uncertainties at home, especially on the country’s leadership succession issue, could drag the market further.

Malaysia’s benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) is already down 6.3% year-to-date (YTD), the steepest decline since 2008 when modern markets were rocked by the global financial crisis.

The composite index, which tracks the performance of Malaysia’s top 30 listed corporates, declined 5.9% in 2018 as billions of ringgits in foreign fund left the country.

AxiTrader Asia-Pacific market strategist Stephen Innes said the FBM KLCI is under duress due to the never-ending political concerns beside the existing trade war fears.

Succession plans for the country’s leadership and current government string of losses in by-elections had rattled investors.

US President Donald Trump’s action of signing the pro-Hong Kong rights bill into law sent shockwaves across global market as investors braced for retaliations from China. Beijing had promised stern actions following Trump’s endorsement of the bill. The FBM KLCI traded between 1,582.28 and 1,588.51 yesterday.

“The Hong Kong bill signing isn’t a surprise, but the market is reacting to retaliation uncertainty,” Innes told The Malaysian Reserve (TMR).

“The base case priced in right now is for a Phase 1 (trade) deal to see a December tariff deferral in one form or another,” he said.

Failing which, markets will be due for a heightened bout of risk-aversion, he added.

“I still think there is an opportunity to position for an upswing in the global economy, but the key

uncertainties remain the timing, and of course a trade deal which would need to include a good chunk of tariff rollbacks to further boost that cyclical recovery,” he said.

A local equities analyst said there is a dearth of short-term catalysts at the moment to lift the Malaysian market, while the outlook for 2020 is hazy.

“The lack of visibility, centred on the uncertain political situation and policy direction, is driving investors to seek certainty in US markets and elsewhere,” the analyst told TMR, adding that the US markets continue to test new highs.

The analyst added that Malaysian equities are also more expensive compared to its regional peers.

“(This is) prompting investors to opt for more attractive valuations in markets that provide greater certainty,” he said.

But it is not all gloom and doom for the local exchange as the corporate earnings of Malaysia’s FBM KLCI constituents have largely come in on the upside.

A key sector in the FBM KLCI is that of banking, which accounts for more than 30% of the index weightage, hence, making the sector crucial in supporting a market recovery, according to Rakuten Trade Sdn Bhd head of research Kenny Yee.

“So far, we foresee many analysts are beginning to be more positive on the (banking) sector in 2020 following a dismal show this year,” he told TMR.

Yee said the FBM KLCI has enough legs to recover provided that foreign funds are less drastic in their selling.

“We believe foreign outflows to diminish towards the end of this year with YTD (outflows) almost reaching a net outflow of RM10 billion. Prevailing reasonable valuations may attract foreign funds going into 2020,” he said.