Rebound in KLCI clouded by recession fears

Covid-19 continues to dominate the narrative in the market with analysts noting the rebound mirrors the pattern noted in previous market downturns


THE technical rebound on Bursa Malaysia is driven by fiscal and monetary stimulus measures announced across the world, but the trajectory is curtailed by the fundamental fact that the world economy is heading to a weaker phase if not, a full-blown recession.

The local benchmark index, FTSE Bursa Malaysia KLCI (FBM KLCI), rose 2.48%, or 31.26 points to 1,291.14 driven by inflows into finance-related stocks.

On the broader market, gainers advanced losers 745 to 163, while 243 counters unchanged and 867 were untraded. The market broke above the psychological 1,300-point level to hit a high of 1311, but could not hold on to the gains and trended lower at the close.

Covid-19 continued to dominate the narrative in the market with analysts noting the rebound on Bursa Malaysia mirrors the pattern noted in previous market downturns, with every new downward thrust interrupted by an intermittent rebound and subsequently followed by another downward thrust.

AxiCorp Ltd global chief market strategist Stephen Innes reckons the positive trading across Asian markets yesterday was underpinned by investors responding positively with the measures announced by the US Federal Reserve (Fed) while awaiting a US$1.5 trillion (RM6.65 trillion) stimulus package from the US Congress.

Innes expects investors to stay in cash and remain nervous about stepping back into the market until data improves (

“Asian equities and fixed income certainly like what they see from the Fed. No one likes the positive correlation between the two when markets are going down, but if they are going up in unison, then it’s most welcomed.

“But once a Covid-19 aid deal is signed, it will be perceived as the icing on the cake,” he told The Malaysian Reserve (TMR) yesterday.

Innes, however, believes the rebound on Bursa Malaysia is a “dead cat bounce”, a term used to refer to a temporary recovery in share prices after a substantial fall.

“It all depends on how long the Movement Control Order (MCO) lasts. At a minimum, social distancing will be in place the remainder of 2020 based on the medical experts, so a longer containment time frame seems more likely than not,” he added.

Innes believes a more extreme measure is on the horizon as the MCO containment effort appears ineffective.

“(Possibly) curfew and also stay home mandates. Yes, it will make things worse for the stock market because it will further erode earnings if even more draconian lockdown measures are taken,” he said.

Innes suggests a recession is possible should the MCO be extended, but aggressive fiscal and monetary policy measures could help provide a massive updraft to the markets once the economy responds.

Hence, he expects equity investors to stay in cash and remain nervous about stepping back into the market until data improves.

“I’ve even started selling small, knowing there could be a higher bounce tonight after the US fiscal policy gets signed. I refuse to move from pricing in the worst recession since World War 2 to a green light scenario in 48 hours, unless the economists have gone off the rails and called wrong as unemployment levels are most certainly going to soar,” he added.

Innes thinks there is far more economic pain to come when current estimates start to fall short of the actual sums of global growth.

“When global GDP goes up in flames, a reality check sets in again,” he added.

MIDF Amanah Investment Bank Bhd head of strategy Syed Muhammed Kifni Syed Kamaruddin is more optimistic believing the local market benchmark is near or may have reached its midway bottom (midway support range: 1250-1150).

“The liquidity injections (both fiscal and monetary) by various governments and monetary authorities would take a bit of time for the real economy to fully recover from the Covid-19 induced pause.

“Thus, in the ensuing months, the economic data may continue to deteriorate on a year-on-year (YoY) basis, while monthly sequential jump may peter out as pent-up demand in the aftermath of the economic great pause is duly satisfied,” he said in a note yesterday.

During this period, Syed Muhammed Kifni said we may see the next wave of selling in the equity market. The duration of the market downturn may last until the third quarter of this year, he added.

“If the world economy were to enter an outright recessionary period, which implies lack of policy traction in regard to both the monetary and fiscal measures, we may see a deeper and more protracted second downward thrust,” he added.

Moving forward, Syed Muhammed Kifni noted based on China’s recent experience, the world could see sequential improvements beginning April in the number of new Covid-19 cases.

And with that, he believes a month-on-month recovery is possible in the economy due to pent-up demand as movement restrictions are relaxed or uplifted.

“Equity markets may react positively to this development, hence engendering the midway rebound,” he said.

Bloomberg data stated in this quarter alone, the FBM KLCI fell 18%, heading for the biggest decline in a decade with March seeing the index fall 12%, bringing the YoY decline to 22%.

In order to mitigate the volatility on the local market, the Securities Commission Malaysia and Bursa Malaysia have temporarily suspended short-selling activity until April 30, 2020.

The move mirrors ban on short-selling in Italy, France and Belgium. StashAway Malaysia Sdn Bhd country manager Wong Wai Ken said such measures taken by exchanges will help curb volatility. “Banning short selling for a limited time is better than halting trading all over,” he told TMR.

Innes, along with other market analysts, foresees more cuts in the Overnight Policy Rate (OPR) by Bank Negara Malaysia (BNM) to cushion the economic impact caused by the virus.

“I see BNM dropping the rates to 1.5%, but I’m a bit surprised we haven’t seen an inter meeting rate cut as it is needed to drive demand now, and even more so when people come out of the MCO cocoon,” Innes said.

Hong Leong Investment Bank Bhd research analyst Chan Jit Hoong expects BNM to cut OPR by another 50bps to 2% this year.

“Key concerns are: (i) Slower loans growth, (ii) further OPR cuts, and (iii) weaker asset quality. Also, the 10-year Malaysian Government Securities has crept upwards due to falling oil prices,” Chan said in a report yesterday. BNM has reduced the OPR by 50bps to 2.5% year-to-date.