China equity turmoil hits Malaysia too, KLCI below key 1,700-point

Bank of america Merrill lynch: The ripple effect from the market correction has yet to show up

PETALING JAYA: Slumping stock prices in China wreaked fresh havoc across the region, with benchmark indices in Shanghai and Hong Kong the worst hit, as fresh measures by the Chinese authorities to stem recent sharp losses failed to calm nervy investors.

The Shanghai Composite Index fell 5.9% yesterday to 3,507 points. The stock measure has fallen 32% over the past three weeks.

Meanwhile, investors were also paying attention to ongoing discussions in financially troubled Greece, which has been given up to Sunday to reach an agreement to save its collapsing economy.

“Investors are jittery about the unresolved issues in Greece and the stock market crash in China,” Kenanga Investment Bank Bhd head of research Chan Ken Yew said.

At home, the benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) fell below the key 1,700-point level, as weak corporate earnings outlook and rising political risk exacerbated the impact of external concerns.

“In Malaysia, domestic political issues are also weighing on market performance,” Chan added.

AmResearch yesterday slashed its year-end target for the FBM KLCI to 1,650 points, while MIDF Research adjusted its forecast to 1,800 points.

Greece’s failure to present a new set of reforms by the new deadline could result in the country leaving the single-currency union of eurozone, a situation popularly termed as “Grexit”.

“Greece alone is not the biggest worry. The bigger concern is whether the Greek crisis could drag other weaker economies in the eurozone down,” M&A Securities Sdn Bhd head of research Rosnani Rasul said.

“If the European Union cannot contain the risks from spreading further, there will be great shaking in the region’s financial system that could cause a domino effect on the global economy,” she explained.

An economic downturn in Europe would affect China, as the region is one of its biggest export markets. A slowdown in China, in turn, would affect global commodity prices and weigh on the growth of many economies, including Malaysia, that count China as their major export destination.

Analysts said that besides external concerns, sentiment towards Malaysian equities has been affected by heightened political risks in the country, following allegations that US$700mil (RM2.6bil) from state investment fund 1Malaysia Development Bhd (1MDB) has ended up in Prime Minister Datuk Seri Najib Tun Razak’s personal bank account.

1MDB was already under investigation by the Public Accounts Committee, while a special task force involving the Malaysian Anti-Corruption Commission, Bank Negara and the police are looking into The Wall Street Journal’s claims.

Amid all the uncertainties and a gloomy outlook, several research houses have started cutting their year-end targets for the FBM KLCI.

AmResearch, for one, has significantly lowered its end-2015 fair value for the FBM KLCI to 1,650 from its earlier target of 1,880, citing a challenging external liquidity landscape and weak earnings prospects for companies. The revision reflected an implied valuation of 15 times price-earnings (PE) multiple.

MIDF Research, on the other hand, has a higher forecast of 1,800 for the FBM KLCI to end the year, despite it being a downgrade from an earlier forecast of 1,900. The brokerage pointed out that its cautious outlook was due to the “triple whammy” risks arising from Greece’s problems, China’s uncertainties and the impending US interest rate hike.

Last week, Kenanga Research cut its FBM KLCI year-end target to 1,810 points from an earlier projection of 1,845, while M&A Securities has set its FBM KLCI year-end target at 1,660 based on a PE multiple of 15.7 times.

Chan said any further revision by Kenanga Research would depend on the upcoming corporate earnings results, even as M&A Securities noted that external factors would continue to weigh on the local market, as the liquidity-driven rally was over.

“External liquidity conditions may no longer be supportive of valuations, as the passage of time to a hike in the US Fed Funds rate narrows in the second half of 2015,” AmResearch explained in its note to clients.

AmResearch said its view was that the market had not fully priced-in an upcycle in the Fed Funds rate, with the expected move in interest rates expected to lead to a re-pricing of equity markets.

Meanwhile, Bank of America Merrill Lynch (BofAML), which had likened China’s stock market crash to a “falling knife”, said the damage caused by China’s equity correction could spread beyond the stock market.

“The ripple effect from the market correction has yet to show up – we expect slower growth, poorer corporate earnings and a higher risk of a financial crisis,” BofAML said in its recent report.

China’s two main indices – Shanghai Composite Index and CSI 300 – have declined by 32% in just less than one month.

Efforts taken by the Chinese government in recent weeks, including cutting interest rates, providing liquidity support, suspending initial public offerings and relaxing trading rules, have so far failed to stem the stock-market decline in the country.

The Shanghai Composite Index yesterday extended its rout, dropping 219.93 points, or 5.9%, to close at 3,507.19, while the CSI 300 fell 264.96 points, or 6.75%, to end at 3663.04. These compares with their peaks this year at 5,166.35 for the Shanghai Composite Index and 5,353.75 points for the CSI 300 in mid-June.

According to Bloomberg, in an attempt to stem the rout, at least 1,321 companies have halted trading on China’s exchanges, freezing up to US$2.6 trillion (RM9.9 trillion) worth of shares, or about 40% of the market’s capitalisation.

“The market has clearly lost its nerve and many investors appear to be rushing to exit,” BofAML said.

China’s slowdown has had an adverse impact on Malaysia. For one thing, China is Malaysia’s second-largest export market, accounting for up to 13.3% of its exports. For another, a slowdown in China would drag down commodity prices, which, in turn, would affect Malaysia’s export earnings.