Better sentiment, but still early to celebrate

SENTIMENT on Bursa Malaysia has been on the mend since July 6, with the FBM KLCI rising up by 8.5%. In fact, the 30-stock index breached the 1,800-point mark again on Aug 8.

The index’s strong upward momentum within the last one month, if it continues, is a likely help to regain the KLCI’s lost market capitalisation postGE14.

One major reason behind the renewed interest is confidence that the new government of Pakatan Harapan will come up with national policies to charter growth, considering the honeymoon period of 100 days is coming to an end.

That said, it is too soon to tell whether the recent rise in the FBM KLCI performance can be sustainable. This is largely because threats or key risks to Bursa Malaysia continue to exist, with the possibility to intensify going forward.

One such risk is the Sino-US trade war going full-blown. Economists have warned that Malaysia’s economic growth could be substantially affected if the trade tensions between both economic juggernauts do not end on the negotiation table.

Alliance Bank Malaysia Bhd chief economist Manokaran Mottain says Malaysia could fall into a recession within the next two years if the trade war goes full-blown in 2019.

Apart from trade war risk, the eruption of a global recession could “apply the brakes” to Bursa Malaysia’s uptrend.

The fact that the world is now at the tail-end of the 10-year economic cycle is telling, and hints towards a likely crash on the horizon.

Besides, a possible “bubble burst” within the domestic property market could also be negative for the local bourse.

Last month, the Institute for Democracy and Economic Affairs (IDEAS) pointed out that the spectacular growth in the high-end property segment over the years has led the bubble in the property market to expand.

“That bubble should now be expected to burst,” said the local think-tank in a statement.

Risks aside, many analysts are optimistic on the market’s development and the reducing uncertainties in the domestic political scene. That said, greater clarity on the Pakatan government’s direction can only be attained once the Budget 2019 is tabled in November.

MIDF head of investment research Mohd Redza Abdul Rahman is generally positive on the first 100 days of the Pakatan government rule. He feels that the market is reacting positively.

“As the economic policies become clearer, the market will continue to inch higher,” he says, adding that the Pakatan government needs to give confidence that Malaysia’s fiscal condition is under control.

To date, the FBM KLCI has exceeded Redza’s end-2018 target of 1,800 points. On whether or not to revise that target upward, Redza says he will still wait for the completion of the second-quarter corporate results as well as the release of key economic indicators such as the gross domestic product figures for the second quarter of 2018.

Should the market continue to show robustness and if this is supported by earnings, Redza says he will look at the banking stocks. He feels they are showing strength due to stronger loan growth, especially for the automotive and property purchases, as well as strong domestic consumer spending.

“The aviation sector is another one to consider, as it has been reporting good earnings, aided by strong international passenger traffic.

“As long as the market lacks clarity, the market is expected to trade in range-bound fashion, especially over concerns on external factors such as trade wars, monetary policies tightening and volatility of crude oil and palm oil prices, which would have an impact, not only on corporate earnings but also the state of the country’s economy in general,” he says.

Affin Hwang Investment Bank Bhd head of equity capital markets Arvin Chia agrees that the market has rebounded very nicely.

“It is a sign of confidence, especially when daily volume trades are being decent. There are also some indications that the foreigners are coming back to our market,” he says.

Chia says the performance of recent initial public offerings (IPO) have been very strong and clients are hungry for more new offerings.

He cites the strong appetite for newly listed Mi Equipment Holdings Bhd, an IPO that was listed in June this year.

Chia feels that the shake-up going on in corporate Malaysia is just a precursor to more corporate exercises and the reshuffling of assets.

“If we look at the government-linked companies (GLCS) and government-linked investment companies (GLICs), there is a lot of potential for money to be raised through these exercises and the creation of more efficiencies.

“So perhaps in the next 12 to 18 months, we might see more mergers and acquisitions, paring down of stakes or divestments among the GLCs and GLICs,” says Chia.

A natural effect of this would be more excitement and upside to the market.

Meanwhile, Rakuten Trade Sdn Bhd vice-president of research Vincent Lau foresees Prime Minister Tun Dr Mahathir Mohamad’s impending visit to China will help revive Bursa Malaysia further.

“Perhaps then we will get more clarity on the Chinese-owned contracts, for example the East Coast Rail Link, but with revised terms.

“Should those meetings result in new partnerships or joint ventures in certain project, and coupled with a stronger relationship between the two countries, this will be very positive for the market,” says Lau.

Taking a contrasting viewpoint from the three analysts, Omni Capital Partners managing director Scott Lim remains neutral on Bursa Malaysia, describing the outlook as “murky at best”.

“Backtracking on election promises will likely backfire and soon investors will feel jaded. Most are adopting a wait-and-see attitude, no hurry to put the money to work,” he says.

Lim does not foresee any major upside for the market due to the fundamental weaknesses over the years.

“If not for the growing debt pile, Malaysia would not have achieved those economic growth numbers.

“It is definitely not the time to celebrate yet. We recommend a dose of reality and there should be more pains to come before any gains,” he says.