Will November be hot or cold?

AFTER we celebrate Halloween in a few days’ time, November will be upon us and before we know it, it will be December and year-end festivities will begin as we usher in the new year.

Weather-wise, except for places like Malaysia or countries around the equator, November can be the start of the winter season in the Northern hemisphere, while for countries in the Southern hemisphere, the start of summer. So, depending on where you are, November can be either hot or cold.

What about the markets in November? Traditionally, the Malaysian market tends to outperform in December, largely due to window dressing activities. Will next month be a better month for markets after the Red October experience? Let’s see what’s in store in the first place before we judge the market’s direction.

Firstly, on Nov 2, Finance Minister Lim Guan Eng will table his maiden 2019 Budget. The budget is the post-GE14 highlight for Pakatan Harapan-led Government as the budget is expected to see sacrifices which Malaysians are expected to make for the nation as the government manoeuvres budget deficit issue as well as to ensure that our finances are well within our ability to service the nation’s debts. Anticipation is not what goodies the government is going to give away but more of what is going to be taxed from us.

The Budget 2019 document is also important as it is not only about finances and revenue of the government but it sets the stage for the next phase of growth and continuing the agenda set in the Mid-Term Review of the 11th Malaysia Plan.

We expect the government to chart the economy that emphasises on new growth engines, promoting both foreign direct investments and domestic investments as well as ensuring that we continue to address the income disparity between the have and have nots.

Meanwhile, the Americans have mid-term elections on Nov 6 as some 435 House of Representative seats and 35 out of the 100 Senate seats are up for grabs. While President Trump’s party presently control the Congress, there is a likelihood that the lower house could flip, but crucially important will be voter turnout.

A loss at the House will dampen the president’s agenda for the remaining of his term in office for the next two years and also, derail his plans to introduce more tax cuts. As it is, the US government is already running a massive budget deficit and clearly more tax cuts would mean the US government will simply have to borrow more and continue to run its printing presses.

A loss at the House could likely see the US markets going into correction as Trump’s business-friendly approach towards Wall Street will likely come to an end.

The above two events will likely shape markets’ direction in November and for the rest of the year and well into 2019. However, before that, the third quarter (Q3) earnings season is also due in November and it will be crucial for corporate Malaysia to deliver what is expected of it by the market.

To re-cap, both the Q1 and Q2 earnings season were disappointing. Hence, just after the end of the Q2 reporting season, brokers had already cut market expected earnings growth for this year from about 6% to just slightly below 4% while earnings growth for 2019 too was marginally lowered to 9.4% from 10.7% previously.

Consequently, the KLCI target from Q1 result season of 1,845 points too has been lowered to about 1,776 points, reflecting the poorer earnings growth expected after the release of the Q2 results in August.

We will observe a lower gross domestic product (GDP) growth for this year and next year. This is mainly due to government’s expectations that the private sector will be an even stronger growth engine of the economy as the public sector finances are constrained while external sector remains challenging due to the tariff war between the US and China.

Hence, it will be a tall order for corporate Malaysia to deliver the earnings growth as expected by the market. Chances are, the Q3 results season will likely be a disappointing quarter, but perhaps the ratio of disappointing results will be better than the Q2 or Q1 results period.

There is a strong likelihood that KLCI target levels will be reduced for 2018 but as brokers begin to tag market fair values based on 2019 earnings, the attention will likely shift towards next year’s earnings growth estimates. Nevertheless, the Q3 results season, which basically ends at the end of November, will likely paint the market’s direction for the rest of 2018.

Hence, whether this November is going to be a hot or cold month for the markets will depend very much on the above three events that are about to unfold while at the same time, we observe the daily market’s volatility driven by missed earnings by major US corporates, a Q3 Chinese GDP that was a tad lower than the estimate, swings in commodity prices and worries of Fed’s planned rate hikes in 2019, which could be as many as this year.

Indeed, it does not look like Novermber is going to be hot for the market and based on what will transpire next month, we will be lucky if the market simply ignores the three key events.

After all, the markets have already corrected rather steeply in the past month alone, mainly on Wall Street’s pullback, something that I have forewarned in my article “Watch out for a Wall Street sneeze” (StarBizWeek, Aug 4).