EXPECT FURTHER VOLATILITY
THE FTSE Bursa Malaysia KLCI (FBM KLCI) sold off to a one-month low last week due to heavy falls on heavyweight rubber glove makers after the US Customs directed its ports to seize Top Glove Corp’s goods over forced labour allegations.
This unexpected twist at the end of the quarter affected investor sentiment and forestalled the anticipated window-dressing support on the last trading day of the first quarter.
However, subsequent recovery was led by the property, technology and energy sectors as economic recovery plays returned, encouraged by a strong rebound in US technology stocks and regional strength following robust China Purchasing Managers Index numbers.
For the week, the FBM KLCI lost 16.07 points, or one per cent, to 1,585.35, with heavyweight rubber glove manufacturers Hartalega Holdings Bhd (-56 sen), Top Glove (-40 sen), Supermax Corp Bhd (-21 sen), Digi.com (-16 sen) and Sime Darby Plantation (-14 sen) accounting for most of the losses.
Average daily traded volume and value last week improved to 7.07 billion shares and RM3.6 billion, compared to the 6.71 billion shares and RM3.57 billion average the previous week, as retail participation remained steady given the rebound seen in small caps.
The strong US non-farm payroll report last Friday could stoke concerns about higher Treasury yield and rattle the financial markets again this week.
The payroll numbers in the coming months could be overwhelming and sustain worries about higher inflation, interest rate and rising Treasury yield despite the Federal Reserve’s (Fed) indication of no hike until 2023.
Whatever the case, one should not miss the forest for the trees when staring at higher inflation and rising bond yields. Bond yields rising on the back of strong economic growth is a healthy problem and not something to be worried about for equity investors. Note that US equity markets continued to chart new highs despite bond yields rising post-US subprime crisis.
The optimistic outlook for the US economy, with multi-trillion dollar stimulus, loose monetary policy, good progress in vaccinations and inflation expectations, could raise the 10-year bond yield above two per cent by year end and around 2.5 per cent by end2022, which was the two-year monthly average prior to the Covid-19 pandemic.
In its recent March meeting, the Fed indicated its willingness to stay pat for the rest of 2022. Based on its inflation forecast of two per cent in 2022 and 2.1 per cent in 2023, the pause in rate could even last longer.
Of course, nothing is cast in stone. With US President Joe Biden’s administration coming out with huge stimulus measures, the risk of overheating in the economy and inflationary pressures rising faster than expected cannot be discounted. However, the resulting crowdingout effect and the potential increase in corporate tax should have mitigating impact as private investment is affected due to higher cost and lower profits.
This should trickle down to impact wages and payroll that will ultimately affect consumption and economic growth. Nevertheless, this is a long process. In the short to medium term, higher taxes and lower corporate profits will prompt investors to look for alpha elsewhere.
Malaysia should benefit as the FBM KLCI is trading at a discount to comparable peers based on consensus calendar year price-to earnings ratio of 13.7 times. The cheap valuation will turn more attractive as the economy recovers almost completely from the Covid-19 pandemic by 2023.
Technical outlook
Bursa Malaysia shares rose last Monday, with gains led by the technology, banks and REIT sectors as economic recovery plays gained traction, but energy and healthcare sectors slipped. The FBM KLCI climbed 9.86 points to end at 1,611.28, but losers beat gainers 654 to 431 on moderate trade totalling 6.71 billion shares worth RM3.58 billion.
Blue chips slipped on Tuesday, led by the healthcare sector, but plantation counters managed to cushion the downside. The FBM KLCI eased 2.09 points to close at 1,609.19, as losers beat gainers 649 to 414 on slower turnover of 5.78 billion shares worth RM3.59 billion.
Key index heavyweights slumped on Wednesday, sparked by selling pressure on rubber glove makers. The FBM KLCI fell 35.68 points, or 2.2 per cent, to settle at 1,573.51, as losers swarmed gainers 858 to 303 on higher turnover of 8.36 billion shares worth RM4.22 billion.
The market rebounded on Thursday, led by the property, technology and energy sectors as economic recovery plays returned. The FBM KLCI recouped 9.13 points to close at 1,582.64, as gainers led losers 787 to 354 on lower turnover of 7.92 billion shares worth RM3.71 billion.
On Friday, the index added 2.71 points to end at 1,585.35, as gainers led losers 621 to 407 on slower turnover totalling 6.62 billion shares worth RM2.92 billion.
Last week’s trading range for the index increased to 47.22 points, compared to the 43.03point range the previous week. For the week, the FBM EMAS Index lost 35.19 points, or 0.3 per cent, to 11,743.10, but the FBM Small Cap Index rose 248.07 points, or 1.47 per cent, to 17,176.81.
Technically, daily momentum indicators on the FBM KLCI stayed neutral as last week’s sharp dip stalled, but weekly momentum such as the weekly stochastics and 14-week RSI hooked back down, signalling further potential correction ahead.
As for trend indicators, the daily Moving Average Convergence Divergence (MACD) deteriorated into the negative zone, while the weekly MACD indicator’s signal line eased lower to imply further correction ahead.
The -DI and +DI lines on the 14day Directional Movement Index (DMI) trend indicator registered bearish expansion following the previous week’s sell signal, with the rising ADX line suggesting an increase in bearish trend momentum.
Conclusion
Given the more bearish technical momentum and trend indicators due to the FBM KLCI’s weak close at a one-month low, further downside volatility can be expected this week.
However, with trading momentum noticeably weaker, selling pressure should dissipate as economic recovery plays are still evident to cushion downside, specifically in the banking, construction, property, technology, telcos, transport and logistics sectors.
Meanwhile, the selloff in key rubber glove makers should cool off as current depressed levels encourage more bargain hunting for an oversold rebound.
On the index, key chart support cushioning downside will be the 200-day moving average (MA) at 1,570, with next crucial support seen at 1,550.
Immediate upside hurdle remains the 100-day MA at 1,606, with recent highs of 1,635 and 1,642 acting as subsequent tougher hurdles.
Bond yields rising on the back of strong economic growth is a healthy problem and not something to be worried about for equity investors.