Further losses await local equities

Bad news related to the coronavirus pandemic or the oil price war could possibly see the FBM KLCI drifting lower towards 1,280, says analyst


MALAYSIAN equities are expected to sustain last Friday’s losses as the crude oil prices and ringgit grapple to trade higher against the deep repercussions of the Covid-19 pandemic on the economy.

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) fell 0.02% or 0.25 points last Friday to close at 1,330.65 following a weak growth projection for the economy by Bank Negara Malaysia (BNM).

Independent financial consultant Leong Hoe Kit said negative sentiment of the pandemic could drag the local benchmark lower towards the 1,280 point range with a possibility of holding above the 1,300- point level depending on the crude oil prices.

“If the oil prices keep improving, it is possible for the FBM KLCI to trade upwards to about 1,375 or higher this week.

“However, a deluge of bad news related to the coronavirus pandemic or the oil price war could possibly see the FBM KLCI drifting lower towards 1,280,” he told The Malaysian Reserve (TMR).

Last Friday, the Brent crude oil futures contract rallied 16.3% to US$34.83 (RM151.86) a barrel in expectation of a new deal to cut the global crude oil supplies.

OPEC and other major producers are said to be working on a new deal for an unprecedented production cut which is equivalent to about 10% of global supply.

Affin Hwang Investment Bank Bhd analyst Tan Jianyuan expects crude oil prices to remain low and volatile should Saudi Arabia and Russia fail to reach a deal to limit supplies as demand falls.

“We expect the risk of existing work activities, possibly lower rates and deferment in the new contracts. Many of the global oil producers have revised down their capital expenditure (capex) in the past cou- ple of weeks, an average of 24% by our observation, following the crash in oil prices.

“However, as of March, Petroliam Nasional Bhd still indicated it remained committed to maintaining its capex,” he told TMR recently.

Tan added that the state-owned oil company is expected to reduce its capex in the coming months.

“A few segments likely to be impacted due to this low oil prices are fabricators, new contracts dependent on capex spending, offshore service vessels and jack-up rigs, as well as the pure upstream players,” he said.

OCBC Bank economist Howie Lee said as the V-shape economic recovery for the sector is unlikely to occur and the effects of demand destruction are expected to drag for a long term.

“The Russia-Saudi Arabia fallout may have precipitated the March 9 collapse in prices, but the real driver of bearishness right now is demand.

“Recall that when the coronavirus was largely confined to China, most expected a sharp V-shape recovery in the second half of 2020.

“That is no longer the case as the Covid-19 episode has spread too far and has lasted too long that it is now expected to have irreparable damage to incomes, consumer spending and investment plans globally,” he said in a report last week.

While the rising global crude storage takes the centre stage of industry concerns, Lee estimated the global crude storage could peak within the next 60 to 90 days.

“While it still remains elusive, multiple agencies have forecast the remaining global crude oil storage to be at between 0.9 billion and 1.8 billion barrels.

“The global supply surplus in April would possibly be at least 20 million barrel per day (bpd) and has yet to include the current supply surplus, which is about 1.5 million bpd by our estimates, and the expected increase in supply of about two million bpd by our estimates,” he said.

On the local currency, Leong said ringgit would trade within the 4.30 to 4.40 range this week and could strengthen further if oil prices recover strongly.

“BNM has a relatively strong balance sheet with more than US$100 billion (RM436 billion) in reserves and unless the Brent crude oil price convincingly goes below the US$25 per barrel level, the ringgit would probably trade in the 4.30 to 4.40 range this week,” he said.

Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said the emerging-market currencies are likely to remain on the back foot this week as investor flows continue to favour the greenback.

“Any dips in the US dollar-ringgit to 4.30 will find plenty of willing buyers with the path of least resistance, a move higher to retest 4.45,” he said.