Political risk priced in as reflected in market downtrend

While local investors will stay cautious, foreign investors will likely to short their positions


POLITICAL turbulence in the country continues to fuel volatility in the local stock market on top of the ongoing health crisis, but plenty of stocks are still feasible regardless of the uncertainty.

The risk-off posture of foreign and institutional funds due to the political risk and lower earnings growth has made the local market the worst performing in the region, down some 8.35% year-to-date (YTD), and could have been worse if not for the heightened participation of retail investors.

“The market is trading in a cautious tone with a bearish bias. Technically, the trend of the FTSE Bursa Malaysia KLCI (FBM KLCI) is down for the short-, medium-, and longterm. To reverse the current downtrend, the FBM KLCI will have to at least move above 1,530 points,” said a chartist with a local brokerage.

In a special address by Prime Minister Tan Sri Muhyiddin Yassin yesterday, he told the nation he still commands the majority support of the MPs despite reports of several Umno lawmakers withdrawing their support of the Perikatan Nasional coalition.

With his premiership being questioned repeatedly, Muhyiddin said he will prove the support in a form of a confidence motion vote at the lower house of Parliament in September.

The motion was proposed and consented to by the King, said Muhyiddin, whom he had an audience with at the palace a few hours before making his address.

The announcement saw the benchmark FBM KLCI come off intraday lows of 1483.7 points to close the trading day at 1,491 or 8.93 points or 0.6% lower with market breadth remaining negative with 333 securities gaining while 685 closing lower.

The market benchmark was lower on stocks like Nestle (M) Bhd which closed 70 sen lower at RM133, while Malaysia Airport Holdings Bhd fell 19 sen to RM5.65.

Rakuten Trade Research VP Thong Pak Leng told The Malaysian Reserve (TMR) in the short-term, market trading is expected to remain volatile and offer plenty of opportunities for traders and investors.

“The long-term outlook should be positive mainly because the economy will recover postCovid-19,” he said.

From a stock selection perspective, Malacca Securities Sdn Bhd head of research Loui Low opined to go for dividend yield stocks for the short-term and tech stocks for the long-term horizon.

“Dividend stocks will provide some certainty for investors in the upcoming quarterly results while in the long-term, tech stocks outlook is still decent, given their business is not really linked to what happens with the government,” said Low.

Bank Islam Malaysia Bhd economist Adam Mohamed Rahim said, amid the current conditions, defensive sectors such as healthcare, utilities and consumer staples would be where the smart money is as these sectors usually exhibit steady demand regardless of the economic cycle or situation a country is facing.

“Such stocks from the mentioned sectors usually have a low sensitivity with the movement of the market or low beta,” he told TMR.

Low said while local investors will stay cautious, foreign investors will likely continue to short their positions after having sold some RM6 billion worth of locals stocks YTD.

“The market should be cushioning the downside risk for now, at least until September when Parliament resumes,” he added.

Areca Capital Sdn Bhd CEO Danny Wong said a parliamentary meeting to decide the political matter of the day could bring some relief to the recent market trajectory.

“With at least a vote in Parliament, the outcome can guide us in the direction of at least one major uncertainty. I view this as good.”

“The local market has been affected badly in the last few months and is the worst performing in the region mainly due to political issues, which also means the market has pretty much priced in the risks,” Wong told TMR.

Wong opined the increasing rates of inoculations is pointing to recovery in the stock market as the economy reopens in phases.

That horizon was pushed back a little as Covid-19 infection numbers hit a fresh high of 19,819 cases yesterday.