FOLLOW-THROUGH RALLY LIKELY

LAST week, the local bluechip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) managed to add on to an end-October window-dressing rally, sparked by hopes for a potential United States-China trade deal and more stimulus to help shore up China’s slowing economy, as investors cheered 2019 Budget measures that lacked punishing taxes, increased stimulus while lowering deficit and hiking revenue targets for next year.

Week-on-week, the FBM KLCI rose 1.8 per cent to 1,713.87, with Tenaga (+66 sen), MISC (+74 sen), Sime Darby (+30 sen), DiGi.com (+17 sen) and Petronas Chemicals (+19 sen) accounting for most of its gains.

Average daily traded volume and value last week stabilised at 2.3 billion shares worth RM1.92 billion, compared with 2.07 billion shares and RM1.92 billion, respectively, the previous week.

The FBM KLCI is expected to undergo a follow-through rally after 2019 Budget turned out to be less stringent than widely expected. The absence of capital gains tax is another big relief for the equity market.

It was another expansionary budget as predicted with a fiscal deficit of 3.4 per cent, slightly lower than this year’s 3.7 per cent, which was revised higher than the previous government’s official guidance of 2.8 per cent.

New forecasts for this year’s and next year’s economic growth are 4.8 and 4.9 per cent, respectively.

It is a decent budget that attempts to bridge the fiscal gap with high impact projects and targeted subsidies without harming economic growth and burdening the wider populace with new taxes.

By any standard, the intention to remain objective in addressing the nation’s debts and long-term competitiveness as opposed to populist measures to please the people that put them in power, speaks volume about the new government’s desire to strengthen the country’s fundamentals and put it back on a higher economic growth trajectory.

It is noteworthy that the government forecast deficits to reduce gradually to three per cent in 2020 before hitting 2.8 per cent in 2021.

The government’s debt-togross domestic product ratio of 51.8 per cent next year is also expected to be within self-imposed 55 per cent.

Total liabilities, including committed contingent liabilities and leased payments, are expected to reduce to 73.5 per cent next year from 80.3 per cent last year.

While these improvements should be viewed positively by rating agencies, the fact that revenue will see a two per cent, or RM4.7 billion, decline next year without the special dividend from Petronas raised a pertinent point about finding new sources of revenue in the future.

Hopefully, we will see a big reduction in the operating expenditures, which rose 10.4 percent to RM260 billion next year, in the 2020 Budget.

Technical Outlook

Bursa Malaysia shares stayed range bound on Monday, but underlying market tone remained weak on lingering worries over geopolitical risks and slowing global economy.

The FBM KLCI ended up 0.67 points at 1,683.73 after ranging between early high of 1,686.83 and low of 1,680.59, as losers beat gainers 588 to 223 on cautious trade totalling 1.85 billion shares worth RM1.43 billion.

Stocks rebounded the next day, as regional sentiment improved after China’s securities regulator stated it would boost market liquidity and promote more longterm investments in domestic stock markets.

The benchmark index closed up 2.21 points at 1,685.94 as gainers edged losers 420 to 358 on total turnover of 1.96 billion shares worth RM1.59 billion.

Stocks rose Wednesday on a window-dressing rally to end October on a more upbeat mode, with hopes for a US-China trade deal helping sentiment.

The FBM KLCI surged 1.38 per cent to close at 1,709.27 as gainers trumped losers 716 to 196 on improving turnover of 2.33 billion shares worth RM2.37 billion.

Blue chips stayed range-bound on Thursday as profit-taking capped the previous day’s window-dressing gains.

The benchmark index shed 2.35 points to close at 1,706.92 as gainers led losers 434 to 364 on total turnover of 2.18 billion shares worth RM1.66 billion.

On Friday, stocks rallied from earlier consolidation as details emerged from the late afternoon announcement of 2019 Budget, as investors cheered the absence of punishing taxes, lower deficit and higher revenue targets for next year.

The index climbed 6.95 points to close at 1,713.87 as gainers swarmed losers 744 to 204 on robust trade totalling 3.16 billion shares worth RM2.52 billion.

For the week, the FBM-EMAS Index gained 2.3 per cent to 11,857.65, while the FBM-Small Cap Index surged 4.5 per cent to 13,101.69.

Due to last week’s strong rebound, a buy signal flashed on the daily slow stochastics indicator for the FBM KLCI, while the weekly indicator has fallen to the lower neutral region but downward momentum has eased.

Meanwhile, the 14-day Relative Strength Index (RSI) indicator has risen into neutral territory with a bullish divergence against the index in place, while the 14week RSI indicator also hooked up to a reading of 40.54.

The daily Moving Average Convergence Divergence (MACD) trend indicator also flashed a buy signal, but the weekly MACD stayed bearish.

On the 14-day Directional Movement Index (DMI) trend indicator, the contraction of the +DI and -DI lines towards each other with the ADX line levelling are signs of weakening in the current downtrend.

Conclusion

Buy signals flashed on the daily slow stochastics and MACD indicators suggest improving technical momentum and good recovery potential for the FBM KLCI ahead.

The bullish divergence signal on the 14-day RSI, as the indicator bounced off a higher low against the index, is another positive factor expected to reinforce upside momentum.

Meanwhile, the welcome surprise over an expansionary 2019 Budget, higher revenue and lower deficit targets should boost local sentiment, but external uncertainties should continue to weigh on the local market.

The welcome surprise over an expansionary 2019 Budget, higher revenue and lower deficit targets should boost local sentiment, but external uncertainties should continue to weigh on the local market.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.