Market turbulence to continue
Cheah Chor Sooi 
The US$50-60 bil targeted by potential tariffs could affect up to 10-12% of Chinese exports to the US

A SECOND round of global equity market sell-off and return of market volatility may be looming across emerging markets (EM), no thanks to escalated concerns over the US initiating trade protectionism measures on China.

A day after the Federal Reserve raised interest rates by 25 basis points (bps) to 1.5%-1.75% on March 21 alongside hints of another two rate hikes for this year, global stock market sentiment was further dampened after President Donald Trump announced tariffs on US$60 bil (RM231.6 bil) worth of Chinese imports.

Reigniting trade war concerns, the move triggered a sell-off on Wall Street with the Dow Jones Industrial Average plummeting more than 1,100 points between March 22 and 23, ending the week in correction territory as it closed 10.4% below its late-January high.

On March 27, the Dow dipped 1.43% or 344.89 points to 23,857.71 as a sell-off in the technology sector fuelled a rout that wiped out much of the previous day’s sizable gains.


External trade

Equity markets to remain volatile over the immediate, short- and medium-term, says Redza

MIDF Research head Mohd Redza Abdul Rahman foresees an impact on Malaysia’s external trade performance given the country’s direct exports to the US constitutes 9% of its total outbound shipments, more than half of which are electrical and electronic (E&E) products and other manufactured goods.

“With the steep tariffs, we view the demand on manufactured goods especially products relating to washers, solar panels, aluminium and steel will drag down Malaysia’s exports to the US,” he tells FocusM. “We forecast Malaysia’s exports growth to the US will decelerate to 3-5% this year compared to 11.8% year-on-year in 2017.”

Mohd Redza expects equity markets to remain volatile over the immediate, short- and medium-term, which in Malaysia’s case will be further exacerbated by the upcoming 14th General Election that must be held by August.

“A sharp downward movement of a good dividend-paying stock could spell an opportunistic bottom-fishing,” he reckons. “The shortcomings or over-reaction on the impact of external factors may also result in the negative bias/mispricing of stocks, ie stocks which are less affected can be purchased at lower prices.”

On the basis of liquidity versus velocity, Redza is of the view that companies with strong fundamentals are likely to be affected by price fluctuations resulting from the perception over market risk, or a disconnect over market sentiment.

“Nevertheless, volatile price movements provide trading opportunities for investors to buy on price weakness and to sell on its strength, especially stocks that have high liquidity,” he argues. “Moreover, the attractiveness of dividend-paying stocks increases in times of price weaknesses, especially for companies with sound financial fundamentals.”


Renewed market volatility

AllianceDBS Research head Bernard Ching sees Malaysia as being vulnerable in the event of a protracted trade war.

This is given the country’s gross exports account for 73% of its GDP last year of which China and the US account for 13.5% and 9.5% respectively (while E&E goods account for 36.7% of Malaysia’s exports).

“In the event of a full-blown trade war between the US and China, Malaysia would likely be adversely affected, particularly the E&E industry,” he wrote in a strategic report. “Having said that, this is not our base case yet as nobody wins in a protracted trade war.”

The E&E industry will be adversely affected in the event of a trade war between the US and China, says Ching

Amid trade war uncertainty and rising interest rates, Ching warned that equity risk premium is unlikely to get any lower. “As such, the days of buying high and selling higher on valuation expansion are over,” he stressed. “We advise investors to focus on fundamentals and valuation.”

AmBank Research chief economist/head Dr Anthony Dass expects the Malaysian market to be caught in the jitters given that exports play a crucial role in driving the GDP as well as concerns over companies involved in the global supply chain production of Chinese exports.

Technical analysis by the research house suggests an immediate sideways trading pattern in the local stock market with the FBM KLCI hovering between 1,838 and 1,881 points. Should the market surpass the 1,881 level, the next resistance is anticipated to be at the historical high of 1,896.

“However, if the market dips below the 1,838 level, the next major support is at 1,795 with the psychological mark at 1,700,” Dass wrote in a recent global investment report.

To safeguard themselves against the risk of a full-scale trade war, AmResearch cautioned investors against over-exposing themselves to export-oriented equity sectors that are highly dependent on global supply chains, given a high likelihood that they will be hit by a combination of rising input costs due to tariffs, and possibly also supply restrictions.

“We suggest investors have adequate global diversification, including assets in the US where some sectors could benefit directly from the tariffs, eg steel manufacturers,” noted Dass. “They should [also] consider equity put options to reduce portfolio volatility.”

Put options are financial instruments that give traders an option to sell assets at an agreed price on a particular date, thus allowing traders to hedge their portfolios

S&P Global Ratings managing director Terry Chan believes China’s response will be the key determinant on what happens next.

“More aggressive moves could escalate into a full-blown trade war between the world’s two largest economies – with spillover effects on global business confidence, investment and growth,” he said.

Preliminary analysis by the ratings agency shows that the overall impact on Chinese corporates and banks will be contained because the US represents only about 15% of China’s exports, while China’s domestic activity now drives its economic growth rather than exports.

The US$50-60 bil targeted by potential tariffs could affect up to 10-12% of Chinese exports to the US. The trade dispute appears to be about technology and intellectual property, so products subject to the tariffs could include computers and cell phones.

However, it’s unclear whether the tariffs will focus on just one or two product categories or be more widespread, S&P Global Ratings further noted. 

This article first appeared in Focus Malaysia Issue 278.