ANALYSTS BULLISH ON BURSA

Sharp rise in ADV of stocks traded and stronger derivatives market set the tone

ARE the bulls back on Bursa Malaysia? Analysts appear to believe so, based on the sharp increase in average daily value (ADV) of local stocks traded so far this year.

This is bolstered by a similarly solid improvement of futures contracts in the derivatives market.

The ADV of RM2.33 billion as of Monday was 17.1 per cent above Affin Hwang Investment Bank Bhd’s expectations of RM1.99 billion ADV for this year.

It averaged RM1.93 billion in January before spiking to RM2.53 billion last month, said Affin Hwang IB analysts Tan Ei Leen and Loh Jia Ying.

Based on the ADV of the first nine trading days of this month, it averaged RM2.83 billion daily, up 11.8 per cent month-on-month.

“Comparing this with our 2017 ADV forecast of RM1.99 billion, the year-to-date ADV of RM2.33 billion is 17.1 per cent above our expectations. Comparatively, we last saw these bullish trading values in January 2011, May-June 2013 (13th general election factor) and August 2014, though they did not continue in the subsequent months,” they wrote in a report yesterday.

They said Bursa Malaysia was currently trading at an estimated velocity of 31.9 per cent year-to-date, based on a market capitalisation of RM1.7 trillion.

“Hence, if we were to extrapolate the ADV potential of our market today based on pre-2007 crisis velocity which rose to 53 per cent, this would imply a potential ADV of RM3.4 billion at a velocity of 50 per cent.”

InterPacific Research Sdn Bhd head of research Pong Teng Siew said trading volumes had jumped to more than three billion shares daily in the past two months.

This was anticipated given that an approaching election usually sparked positioning by funds and investors, he added.

“Money supply has also increased. Speculative interest and a fresh bout of merger and acquisitions (M&As) appear to be brewing, which boost speculative interest,” Poh told NST Business.

MIDF Research deputy head of research Mohd Redza Abdul Rahman feels that it is too early to say the bulls are back for good.

“We can see the leg of a market recovery but there are external factors that could dampen or slow down the rise and these concerns have resulted in our benchmark index having failed to break the 1,730 mark, after briefly touching it on March 7.

“Ceteris paribus,

the market is expected to do well this year on the back of expected earnings recovery, particularly from index heavyweights in the FTSE Bursa Malaysia KLCI (FBM KLCI), to be led by banks.”

Redza, however, said it seemed that sectors such as technology, property and construction had run ahead of banks and outperformed the index. For property and construction players, this might not be sustainable now with the lack of impetus such as job replenishments and higher take-up rates of projects.

“We are wary about the currency movements, although we expect the ringgit to strengthened further in the second half of this year.

“However, we like it that the current rise in volume is seen across the board, including the small mid-cap counters based on the average trading price of below 95 sen over a high average daily volume of 2.4 billion shares, compared with only 1.6 billion shares in the second half of last year at the average transaction price of RM1.10,” he said.

Stronger derivatives market

On the derivatives front, Tan and Loh said the number of average daily contracts (ADC) had risen rapidly by 9.9 per cent month-on-month in January and 36.7 per cent last month, although ADC fell 27 per cent during the nine trading days of the month so far.

“On a year-to-date comparison, the ADC of 52,584 is below our expectation of 59,500 by 11.6 per cent. On a positive note, we believe the ADC will continue to pick up in subsequent months given the improving trading sentiment,”

they added.

Trading catalysts

Tan and Loh noted that Bursa Malaysia had taken a turn for the better on the current optimistic sentiment, with trades mostly underpinned by local institutional investors at 49 to 50 per cent of total value, and foreign investors at around 20 per cent.

Tan and Loh believe that the inflow of funds and preference of equities over the bond market could continue to underpin the current market momentum.

A recovery in corporate earnings, a stronger outlook this year with a pipeline of new listings and corporate M&As or demergers, rising market participation, a sustainable commodity cycle and rising sentiment over the upcoming general election could also boost trading activity.

Meanwhile, Redza has kept the FBM KLCI year-end target at 1,830 level and is cautious about the impact of geopolitical issues on market sentiment. These include elections in France and Germany, the presidential election in South Korea, Britain leaving the European Union and impact of government policies in China and the United States.

Bursa closed 0.3 per cent, or 5.11 points, lower to 1,717.360 yesterday.

We can see the leg of a market recovery but there are external factors that could dampen or slow down the rise...

MOHD REDZA ABDUL RAHMAN

MIDF Research deputy head of research