Lacklustre KLCI to persist
Cheah Chor Sooi 

IN stark contrast to record-breaking key regional indices such as Japan’s Nikkei 225, Hong Kong’s Hang Seng and Jakarta Stock Exchange Composite indices which are in “bullish but overbought” positions, the FBM KLCI has of late been languishing in the “sideways to bearish” trend.

Stock analysts expect such trend to persist as they do not deem the recently announced third quarter (Q3) GDP at 6.2% year-on-year (yoy) – which pushed the year-to-date (YTD) average GDP to 5.8%, exceeding Bank Negara Malaysia’s full year projection of 5.2-5.7% – to be the right shot in the arm for the local bourse.

Likewise, it can be “mind-boggling” given the sluggish KLCI performance comes at a time when both the ringgit and crude oil prices are strengthening. Year-to-date (as of Nov 22), the local currency has appreciated 8.44% against the greenback to 4.1075 from 4.4938 while the Brent crude has spiked above US$63/barrel from RM55.47 for a more than 13.6% gain.


Unexciting corporate earnings

UOB Kay Hian head of research Vincent Khoo attributes the current lacklustre state of the KLCI to relatively unexciting corporate earnings growth and weak policy execution.

Relatively unexciting corporate earnings growth and weak policy execution, says Khoo

“Despite the significant improvement in headline economic indicators, the transmission into domestic consumption growth and corporate earnings have been modest at best,” he tells FocusM.

“At the same time, there’s been foreign outflow in the second half of this year as foreign investors have opted to put their money into neighbouring countries where there’s better momentum in the equity markets.”

Khoo observes that most of the alpha gains in recent times are made from non-KLCI component stocks, particularly mid-cap counters in the construction and electrical & electronics (E&E) sectors.

“The E&E sector in particular will continue to deliver attractive long term gains, while selected construction companies will still be able to leverage the various mega project rollouts,” he rationalises.

“[However] we’re quite selective on the oil & gas sector as we take the view that the recent run-up in oil prices would still not significantly reignite Petronas’ exploration and production activities. Thus we prefer companies with overseas exposure like Bumi Armada Bhd.”


Lack of catalysts

That ringgit is holding steady is a sign that foreign funds are still in Malaysia waiting to re-enter the market, says Lau

Rakuten Trade vice-president (research) Vincent Lau opines that market sentiment has been tepid coupled with foreign selling and the scarcity of major catalysts to spur the benchmark index northward.

“KLCI stocks have been laggards, hence long-term investors should take the opportunity to accumulate blue-chip stocks by buying on weakness,” he says. “Stocks from the construction and banking sectors as well as small- and mid-cap counters that have undergone correction lately can also be considered.”

A view at the fund flow chart saw foreign investors dumping an estimated RM297.1 mil net of Malaysian equities on the week of Nov 13-17, the highest weekly attrition in seven weeks, according to MIDF Research’s weekly fund flow report.

By virtue of the intense foreign selling, the cumulative YTD inflow has substantially decreased to RM9 bil from RM9.31 bil in the previous week. Nonetheless, the YTD inflow still offsets about 31% of the total net outflow from 2014 to last year.

“Even though foreign selling intensified in recent weeks, we have yet to see the ringgit weakening which may suggest that foreign funds are still in Malaysia waiting to re-enter the market,” observes Lau.

Externally, he is of the view that the impending rate hike by the US Federal Reserve and quantitative tightening flowing back to the US market (which is experiencing longest bullish streak) as well as tax cuts plan falling in place as possible reasons behind the foreign selling streak on Bursa Malaysia.

All-in, Rakuten Trade has revised its year-end target for the KLCI to a 1,820 base on 16 times FY17/18 and 1,920 for next year.

Chart-wise, AllianceDBS Research analyst Teoh Chang Yeow foresees the KLCI consolidating further with an immediate support zone of 1706 to 1,713. A fall below 1,706 would pressure the index further to the subsequent support at 1,690.

In his recent weekly KLCI reading, he reckons the market hurdle to be pegged at 1,733 with a crossover of 1,733, enabling the benchmark index to test the next resistance at 1,752.

Hong Leong IB Research retail research head Loui Low Ley Yee deems the KLCI as a huge laggard against regional peers as sentiment was dampened largely by the ongoing Q3 reporting season and political uncertainties ahead of the upcoming 14th general election.

“Nevertheless, we view that current base-building process above 1,700-1,706 bodes well for a resumption of a possible catch-up relief rally in December ahead of the potential year-end window- dressing,” he suggests. “Key supports are 1,706/1,700/1,684 while resistances are situated at 1,728/1,742/1,752 levels.”


Push factors

Another observer who spoke on condition of anonymity argues that the push factors might be more than what meets the eye.

“Economically speaking, Budget 2018’s anticipated GDP growth of 5-5.5% for 2018 may not sound convincing to big- time investors as they want to know whether the growth is to be funded by loans or cash,” he points out. “Obviously, making massive borrowing to fund growth is never sustainable.”

The hawkish position of Bank Negara to consider raising the overnight policy rate in tandem with speculation that the US Federal Reserve is contemplating a third rate hike this year also does not augur well with the current economic performance which is seen as “still weak”.

“Above all else, a pre-election rally is not within sight as funds to spark market frenzy have probably fizzled out,” he adds. 

This article first appeared in Focus Malaysia Issue 260.