US election, political turmoil to keep KLCI below 1,500

by SHAHEERA AZNAM SHAH / pic by ARIF KARTONO

THE benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) is expected to see increased volatility ahead of the US presidential election result, the tabling of Budget 2021 and the earnings season.

Bank Negara Malaysia’s Monetary Policy Committee is scheduled to meet tomorrow, setting economists to speculate a cut in the Overnight Policy Rate to support economic activity during the third wave of Covid-19 infections.

Bursa Malaysia’s main index has largely hovered below the 1,500-point level last week amid ongoing political uncertainty and rising Covid-19 cases domestically.

The strong performance from key glovemakers temporarily lifted the KLCI above the 1,500-threshold before it pulled back, dragged by regional markets.

“We believe the market may remain sideways ahead of the US election as market participants may remain sidelined ahead of the national poll on Nov 3.

“We are also heading to the quarterly reporting season and Budget 2021 on top of recent political developments. Those factors are more important to look out for,” Malacca Securities Sdn Bhd head of research Loui Low told The Malaysian Reserve.

The stance was echoed by global stock markets as main benchmark indexes became more volatile into the US election said Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley.

He said the volatility in the equity markets is going to be further distorted by Covid-19 variables, which will cloud future forecasts.

“The underlying theme though will be 0% interest rates and large amounts of quantitative easing continuing in the world, and that will push asset prices higher, including Malaysian equities.

“The strength of the move will be dictated by the Covid-19 vaccines, and if they are rapidly distributed, it will result in an opening of international travel again,” he said.

Looking deeper into the US election, Bank Islam Malaysia Bhd economist Adam Mohamed Rahim opined that a Democratic victory will exert pressure to the crude oil prices due to the party’s renewable energy (RE) initiatives.

“We believe a Joe Biden-victory would be negative for oil prices as the presidential candidate has proposed to spend US$1.7 trillion (RM7.05 trillion) for RE initiatives, in line with its zero net carbon emissions initiatives by 2050.

“His win would be a leading indicator of the falling oil demand from the US compared to a Republican victory as reducing carbon emissions is not at the top of the list for US President Donald Trump,” Adam said.

He added that a Democratic victory is expected to enable OPEC to regain control in pricing power over crude oil given its presidential candidate’s stance on the energy industry.

“Biden has always been an opponent to fracking and a huge proponent to green energy. This would make it easier for OPEC to control oil prices. Taking all of these into consideration, Malaysia’s oil and gas (O&G) counters are expected to benefit,” he said.

Biden has expressed in his policies for the 2020 election that he will focus on research and development of clean energy as well as offer tax credits to boost renewable power and electric vehicles production.

The presidential nominee also mentioned prohibiting new O&G projects on federal lands, which could be a serious setback for the US as it has advanced to be the world’s largest oil-producing country in 2019 with the discovery of shale oil, producing more than 12 million barrels of crude oil per day.

Adam believed the local counters tied to the industrials and energy sectors would react positively from the development as investors were anticipated to flee offshore markets and take shelter locally.

He added that the FBM KLCI is expected to trade in a range of 1,400 to 1,500 points in the near term as the market sees a knee-jerk reaction from the political uncertainty which will keep the index below 1,500 points.

The ringgit is expected to remain rangebound due to the political uncertainty in addition to the spike in Covid-19 cases. This is capped by the weakening US dollar, Adam said.