Equity market to encounter another wave of selling pressure in 3Q
KUCHING: The local equity market will likely encounter another wave of selling pressure, possibly in the third quarter (3Q), analysts say.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) recapped that the world’s equity market rebound went into overdrive since mid-May on the prospect of post-lockdown economic recovery but arguably driven by burgeoning financial liquidity worldwide.
“It must also be highlighted that the start of the recent price rally coincided with the commencement of the US$0.5t Secondary Market Corporate Credit Facility (SMCCF) on May 12 by the US Fed,” MIDF Research said.
“In this regard, the correlative impact (of the US Fed providing backstop on credit risk premium) towards equity pricing cannot be underestimated.
“During the past three weeks, international equity market indices rebounded impressively. On Wall Street, the Dow Jones Industrial Average (DJIA) recouped the early March levels as it regained the 27,000 points mark.
“Meanwhile, the tech-laden Nasdaq Composite (with some constituents seen as beneficiary of the lockdowns) even managed to register a new all-time high level.”
MIDF Research noted that likewise, the local benchmark also had a good run since mid
May.
It further noted that in spite of profit taking, the FBM KLCI ended last Thursday at 1,557.25 points which was still more than erased all of the losses incurred after the March 11 Covid-19 pandemic declaration by the World Health Organisation (WHO), as well as all of the losses in reaction to the March 9 crash in crude oil prices due to production cut spat between Saudi Arabia and Russia.
“It is implicit in the prevailing buoyant world’s equity market performance that there will be no second (and subsequent) wave of Covid-19 infections, the Covid-19 vaccine shall be found (sooner than normally expected) hence rescinding the need for social distancing and its attendant adverse impacts on economic activities, and the economy’s slated for a V-shape recovery after the lockdown is over with very limited fallouts on both the corporate and consumer fronts while social norms would quickly reverting back to the old normal.
On the above score, fundamentally, MIDF Research believed the unfolding reality may differ from what the liquidity-driven market is currently implying.
“Firstly, the WHO says that the Covid-19 could become endemic, the virus would never go away, thus the risk of subsequent waves of infections remain present until the society develops herd immunity.