Markets shift to risk-off mode on war

The bearish sentiment in the global markets was triggered by new highs in crude oil price 

by NUR HANANI AZMAN / Pic by BLOOMBERG

THE threat of a prolonged war and resulting supply chain disruptions and more hawkish central banks amid rising inflation expectations has made nervous investors shift to a risk off mode pending further clarity on various market factors. 

The bearish sentiment in the global markets was triggered by new highs in crude oil price that edged past the US$130 (RM543.40) a barrel mark yesterday on news Washington was considering an import ban on Russian crude along with its European allies which would result in sharply higher inflationary pressures. 

“The uncertainty in markets is leading investors to sell first as a sustained and sharp rise in energy prices could result in sharply higher inflation which will lead central banks to raise rates much faster than expected and hurt economic growth and corporate earnings,” said an analyst with a local brokerage. 

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) index fell 31 points or 1.96% to 1,572 points on sustained selling across the board. The tech index continued its plunge, falling 6.4% or 4.6 points to 67 points yesterday from 97.7 points in early January. 

Fitch Ratings last week stated that inflation challenges will increase the risk of recession as recent inflation outturns have been higher than expected and the price outlook is uncertain. 

“Inflation is a dynamic process and can be self-reinforcing. Various factors could keep core inflation high throughout 2022. Global energy price shocks related to the RussiaUkraine crisis exacerbate risks,” it noted. 

The Russia-Ukraine conflict has resulted in a rally in the commodities market on concerns over shortages of products like wheat, sunflower seed oil, palladium and nickel due to the sanctions in place on Russia. 

Rakuten Trade Sdn Bhd head of research Kenny Yee said companies with high valuation, such as tech companies, could face further selling pressures. 

“We would advise investors to opt for tech companies with visible operation and earnings growth. I don’t think funds are flowing out of the tech counters to resource-based counters in a prominent way. Our commodity sector is mainly made of plantation counters and the current high prices of crude palm oil (CPO) might not be sustainable, so investors need to be cautious,” he said in Rakuten Research Team’s first quarter 2022 market outlook virtual media briefing. 

Yee retains an ‘Overweight’ call on the tech sector despite the recent sell down as he continues to see growth in the sector as observe aggressive expansion among semiconductor players. 

Inari Amertron Bhd, he said, recently committed RM299 million to form a joint venture with China Fortune-Tech Capital to set up a plant in China, offering outsourced semiconductor assembly and test related businesses. 

Western Digital Technologies Inc has set aside RM1 billion for a new plant in Sarawak while Intel Corp announced its investment of more than RM30 billion for its Malaysia facility in Penang. 

Despite the near-term bearish market pressure and rising volatility, Rakuten Trade maintained its year-end FBM KLCI target at 1,700 points as it anticipates sentiments on the local bourse to improve gradually amid increasing liquidity provided by foreign fund inflows buying into index-linked counters. 

“Our year-end target of 1,700 points for 2022 is premised on 14 times market price-earnings, notwithstanding the one-off prosperity tax, which may erode 2022 earnings growth by 1% to 2%. 

“Although 2022 earnings growth is seen as anaemic, we believe the banking and plantation sector will surprise on the upside. As for calendar year 2023, we are expecting earnings growth to rebound to 7.2%,” he said. 

Yee expects the ringgit to strengthen against the US dollar to around 4.10-4.15 levels amid the crude oil prices recovery coupled with the inflow of funds. 

Following a 2.5% drop in 2020, foreign shareholding on the local bourse continued to decline in 2021. However, the situation has improved with foreign shareholding rising to 11.71% at the end of February. 

Bursa Malaysia saw a record net foreign outflow of RM23.8 billion and RM3.3 billion in 2020 and 2021, respectively. 

For 2022, the foreign fund flows appear to have reversed as year-to-date foreign inflows totalled RM3.85 billion and Yee expects this to improve further. 

“We expect volatility to heighten as tapering is a reality now in the US plus possible interest rate hike. As such, we expect foreign funds to continue to flow into Malaysia as the lower volatility here will act as a cushion to any external vagaries,” he added. 

The online broker added that the local market valuations are alluring coupled with the fact that it is under-owned by foreign funds currently. 

“The high CPO and crude prices will ease the country’s fiscal situation. Corporate earnings growth remains decent for 2021, however, growth for this year may be affected by the prosperity tax application,” Yee said.