A BEARISH sentiment beckons for the financial markets tomorrow (Monday) as investors ranging from foreign funds to local institutions and retail investors react to political uncertainties that are gripping the country.
Both the equity and bond markets could see some knee-jerk sell-off led by foreign outflows if an Emergency is declared, according to Affin Hwang Capital Asset Management (AHCAM).
“As an immediate response, we expect foreign investors to be spooked by this development thus leading to more portfolio outflows,” the company said in a market view, adding that business and consumer sentiment should deteriorate further.
However, the asset management company caveated that the situation “could change and improve if the PM can convince the public that this is an interim measure and short-lived with the aim to rein in COVID-19 and that they will continue to govern sensibly”.
Yang di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah and Malay rulers are scheduled to meet at 2.30pm today (Sunday) to discuss proposals that were forwarded by Prime Minister Tan Sri Muhyiddin Yassin to the King following Friday’s special Cabinet meeting as Malaysia contends with the impact of the COVID-19 pandemic.
On the credit rating front, AHCAM does not expect an immediate downgrade by rating agencies but believes that downgrade risks have risen as the country’s debt metrics and political stability have been deteriorating.
“They will also be looking at Budget 2021 fiscal targets, and would want to see commitment to fiscal consolidation over the medium term, even if the federal budget is more expansionary,” reckoned the asset management company.
“On the flipside, rating agencies also recognise that even as debt level rises, our deep domestic capital markets and high savings provide a stable funding pool for government debt which partly offset these fiscal weaknesses.
With regard to the bond market, AHCAM expects foreign portfolio outflows to occur in the event of a state of emergency is declared.
This is given that investors are positioned cautiously ahead of the planned Budget 2021 (Nov 6) as well as Bank Negara Malaysia’s (BNM) policy meeting (Nov 3) and the US presidential election (Nov 3).
“If the planned federal budget is more expansionary than what the market anticipates (fiscal deficit of 6% of gross domestic product), this could lead to a further sell-off on the back of higher government bond supply in 2021,” noted the asset management company.
On the other hand, it expects BNM to cut the overnight policy rate (OPR) by another 25 basis points (bp) to keep interest rates low to support economic activities, thus keeping a lid on bond corrections to within 10-20bp from current levels.
On the foreign exchange front, AHCAM said portfolio outflows and weakened confidence would lead to a weaker ringgit outlook, especially against regional currencies.
It expects the ringgit to trade between 4.20-4.30 in the near term against the greenback should Emergency be declared.
“Over the medium-term, we still believe that the current low interest rate environment, ample liquidity pool and the flight to safe haven assets amidst economic uncertainties would be supportive of the domestic bond market,” added AHCAM.
Concurring with AHCAM, TA Securities Research head Kaladher Govindan said concern about emergency rule could unnerve investors should the King agrees to an Emergency rule after consulting other rulers today.
“It will induce greater foreign selling if interpreted as political move than economic urgency,” he told FocusM.
“For long-term investors, this is an opportunity to buy on weakness as there is ample liquidity in the system globally to drive an equity market rally.”
With potential vaccine for COVID-19 around the corner, Kaladher opined that there is great potential for stronger equity market next year.
“We prefer defensive sectors like glove, utilities and consumer apart from growth plays in technology and the oil and gas sectors. For next week, expect the FBM KLCI to trade between 1,450 and 1,500 points if an Emergency rule is imposed, otherwise within the 1,485 to 1,522 range,” he added. – Oct 25, 2020
