VOLATILITY LIKELY TO PERSIST
THE benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) saw very choppy trade last week, bouncing off to end the week significantly off a fresh near fourmonth low given the extreme downside volatility in the healthcare, energy and technology stocks sparked by heavy corrections on Wall Street due to inflationary and valuation concerns. Lower liners and small caps also suffered profit-taking pressure ahead of the weekend due to spillover from heavy corrections in the region last Friday.
For the week, the FBM KLCI fell 7.18 points, or 0.45 per cent, to 1,577.75, as heavy losses on key rubber glove makers Top Glove Corp Bhd (-81 sen), Hartalega Holdings Bhd (-RM2.05) and Supermax Corp Bhd (-96 sen) overshadowed gains in Press Metal Aluminium Holdings Bhd (79 sen), Tenaga Nasional Bhd (TNB) (22 sen) and Axiata Group Bhd (18 sen).
The average daily traded volume and value last week was 11.54 billion shares and RM6.37 billion, compared with the 12.32 billion shares and RM5.76 billion average the previous week.
With the vaccination programmes kicking in, expectations of faster economic recoveries around the globe have triggered not only a rise in long-term bond yields but also heavy selling in equities.
Bond prices fell in anticipation of strong economic recoveries that will lead to higher interest rates in the future, which will make returns from existing bondholdings inferior compared with new bond issuance that carries higher coupon payment.
Thus, bond prices fall and yield rises to compensate for that.
This affects equities, and the expected rate-of-return in valuing a stock includes a risk-free rate, which is benchmarked usually against the long-term bond yield, and equity risk premium.
In the United States particularly, the 10-year bond yield shot up above 1.6 per cent last Thursday before ending lower at 1.4 per cent the following day due to expectations of the House of Representative approving the US$1.9 trillion stimulus plan. The US president announced last Saturday that the house had approved the plan, thus paving the way for the next debate in the senate.
As far as the nation’s economy is concerned, we have witnessed deflationary pressures easing to -0.2 per cent year-on-year in January versus -1.4 per cent year-onyear in December.
It was expected to become positive last month, largely contributed to the pickup in oil prices.
The trend will persist for the rest of this year, underpinned by the extremely lower base, pentup demand as consumption and private investments recover from the Covid-19 pandemic and higher crude oil prices. This year’s inflation rate is likely to be around three per cent versus -1.2 per cent last year.
This is just a normalisation process after the pandemic caused the world to come to a standstill, and the momentum in inflationary pressures could taper off next year, especially with the pickup in consumption levelling off and crude oil prices potentially stabilising around US$70 per barrel, which is not far off from current levels.
Thus, there is little pressure on Bank Negara Malaysia to tweak the 1.75 per cent Overnight Policy Rate when the monetary policymakers meet this Thursday.
Current worries over rising bond yield should not affect the attraction in the local equity market as the consensus corporate year 2021 corporate earnings growth of more than 20 per cent and the official economic growth forecast of between 6.5 and 7.5 per cent far exceed the growth in inflation.
This should lead to higher capital gain and dividend yield, the key factors that drive investment decisions, which should more than offset the impact of rising bond yields and attract more investors to switch from bonds to equities.
Thus, any correction in the equity market this week is a good opportunity to establish long positions in blue chips, value plays and growth stocks.
Technical outlook
The local index shed only 3.79 points to end the week at 1,577.75, off an early high of 1,586.23 and low of 1,563.56, as losers swarmed gainers 931 to 317 on slower turnover totalling 9.81 billion shares worth RM7 billion.
Last week’s trading range for the blue-chip benchmark index was reduced to 29.96 points, compared with the 41.08-point range the previous week.
For the week, the FBM EMAS Index eased 27.44 points or 0.24 per cent to 11,614.17, while the FBM Small Cap Index slipped 191.15 points or 1.15 per cent to 16,377.28.
On the FBM KLCI technical momentum indicators, the daily slow stochastics hooked up from oversold territory due to last Friday’s late V-shape rebound from an intra-day low, implying good technical rebound potential this week.
However, the weekly indicator retraced closer to the oversold zone. Meantime, the 14-day and 14-week Relative Strength Index indicators hooked down to imply further potential downward correction.
On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line also hooked up with the potential to trigger a buy on further strength, but the weekly MACD indicator continued its descent.
The -DI and +DI lines on the 14day Directional Movement Index trend indicator registered negative expansion on a rising ADX line, suggesting an emerging downtrend.
Conclusion
Following last week’s volatility, technical momentum and trend indicators on the FBM KLCI deteriorated further with shortterm oversold signals, which suggested rebound potential overshadowed by weaker trending indicators, hence further downside volatility is expected this week.
However, while further correction on Wall Street last week on persistent inflationary and high valuation worries may spill over to the region, domestic economic recovery plays should cushion downside, with the banking, plantation, technology, utility and oil and gas sectors attracting bargain hunters on any further sharp dips.
Crucial index support remains at the recent low of 1,557 and the 200-day moving average (MA) at 1,552, with 1,521, the 23.6 per cent Fibonacci Retracement of the 1,207 to 1,618 upswing, acting as a stronger support platform.
Overhead resistance will be the 30-day MA at 1,590, with more difficult hurdles coming from 1,600, the 50-day MA (1,608) and 1,620.
Stock-wise, banks, plantation and utility heavyweights CIMB Group Holdings Bhd, Malayan Banking Group, IOI Corp Bhd and TNB should attract buyers this week on economic and commodity recovery play, while key technology stocks, such as Globetronics Technology Bhd, Inari Amertron Bhd, SKP Resources Bhd and VS Industry Bhd, should see strong bargain hunting interest cushion severe downward corrections.
Bond prices fell in anticipation of strong economic recoveries that will lead to higher interest rates in the future, which will make returns from existing bondholdings inferior compared with new bond issuance that carries higher coupon payment.