By Ranjit Singh
INVESTORS reacted positively to the first quarter gross domestic product (GDP) announcement yesterday with the market barometer, the FBM KLCI, breaching the 1,400 points level on May 14.
Malaysia recorded a gross domestic product (GDP) growth of 0.7% for the first quarter of 2020, which had caught many economists by surprise as it was expected to tread much lower in view of the Movement Control Order (MCO) imposed by the government on March 18.
The MCO has since been eased to a Conditional Movement Control Order (CMCO), which is slated to end on June 9. The restriction to movement had seriously affected businesses as economic activity ground to a halt.
The FBM KLCI, which has seen a loss of market capitalisation of around RM260 bil since the Covid-19 outbreak in late January, has been holding up quite well today after the GDP announcement. The Dow Jones Index lost 516 points yesterday to close at 23,247 points and this has had a marginal impact of a 1.17 points decline in the FBM KLCI as at 2.30 pm today.
Phillip Mutual Bhd chief strategist Phua Lee Kerk told FocusM that the market was expecting a sharp plunge in the GDP in the second quarter and this has been factored into the valuations. Some economists are looking at a decline of 1.1% in the GDP for the quarter.
“The market is expecting the GDP to come into negative territory for the second quarter and this has been factored into valuations,” said Phua.
However, Bank Islam Bhd chief economist Dr Afzanizam Abdul Rashid told FocusM that the market would display knee-jerk reactions as the GDP falls sharply in the second and third quarters.
“I think there will be knee jerk reactions along the way especially when the GDP becomes sharply negative in 2Q and 3Q. Apart from that, the intermittent spike in new infection cases could also cause the market to gyrate, especially when there is no effective vaccine being developed and there is no antibody for those who have been infected and subsequently cured,” said Afzanizam.
He opined that the large economic stimulus package provided by the government to mitigate the Covid-19 impact would provide some stability to the economy and by default to the market.
“Having said that, the economic stimuli coming from fiscal and monetary policy have been sizable and therefore, if the stimuli can be channelled more effectively and efficiently, it could stabilise the economy. This will provide some relief to the market. In a nutshell, it should continue to be volatile for equities. But the investment strategy is what really matters. So one would need to dissect the industries and companies that would benefit from the current pandemic scenario,” said Afzanizam.
Sunway University professor Dr Yeah Kim Leng said GDP growth was reflective of corporate earnings.
“GDP growth numbers are reflective of company earnings. They are released about two months after the end of the quarter. Although they are a lagging indicator, any surprise will affect the real-time stock performance.
“The better-than-expected 1Q GDP performance, therefore, would have a positive effect on the current stock prices. The stock prices prevailing currently would also have factored in the dreaded 2Q GDP performance where the movement restrictions were in place for one and half months during the quarter. If the contraction turns out to be worse than expected, then the stock market will be under increased selling pressure,” said Yeah. – May 14, 2020
