KLCI down 29 points

PETALING JAYA: Malaysian stocks tumbled yesterday as the reality of the record high crude oil price began to bite and the Government took drastic measures to reduce subsidies.

The KL Composite Index (KLCI) plunged as much as 39 points to an intra-day low of 1,214 yesterday before clawing back to close at 1,223.56, down 29.56 points, or 2.4%.

The sharp drop came after brokerages, including Aseambankers, CIMB Research and AmResearch, trimmed their year-end targets for the KLCI.

The main concern was that the huge increase in fuel and electricity prices in the domestic market could lead to slower economic growth and lower companies' profits.

“In our opinion, the market's concern will escalate from political risks to growth fears as inflation accelerates from rising fuel, food prices and progressive dismantling of ceiling prices and subsidies,'' AmResearch said yesterday.

The brokerage slashed its fair value for the KLCI to 1,180 from 1,300 points. Aseambankers cut its target to 1,250 points from 1,300, while CIMB adjusted downwards its forecast to 1,290 from 1,350 points.

This is probably the start of another round of downgrades for local stocks this year. The first, in March, was sparked by the Barisan Nasional's worst-ever performance in general election.

Foreign brokerage UBS Investment Research noted yesterday that the price hikes would give the Opposition parties a fresh opportunity to criticise the Government's economic policies, thus further raising the political uncertainties.

Prime Minister Datuk Seri Abdullah Ahmad Badawi announced on Wednesday a price hike of 41% for petrol and 63% for diesel sold at local pumps effective yesterday. The prices are to be reviewed every month to keep them in line with global prices.

Abdullah also said Tenaga Nasional Bhd (TNB) would be allowed to increase electricity tariffs from July 1 and that the Government would impose windfall taxes on independent power producers (IPPs) and plantation companies.

“While we view a reduction in government subsidies positively over the longer term, as it would reduce the budget deficit and minimise distortions in the economy, the price hikes are far higher and wider than expected and would have a negative impact on consumer sentiment and corporate profits,'' CIMB Research said.

Yesterday, British American Tobacco (M) Bhd led losers after shedding RM1.75 to RM43.50 followed by palm oil grower Kuala Lumpur Kepong Bhd, which was 90 sen lower at RM16.50.

IOI Corp Bhd, which fell 20 sen to RM7.10, was the most active stock with 37.3 million shares traded. The windfall tax on IPPs and plantation firms took the shine off these counters, many of which enjoy high foreign shareholding.

Among the big movers yesterday, Digi.com Bhd eased 60 sen to RM24.20, Public Bank Bhd's foreign tranche lost 50 sen to RM10.90, while power plant owner Tanjong plc dipped 50 sen to RM15.40.

The ringgit weakened against the US dollar for a third straight day, down 0.4% to 3.257 to the greenback.

Bank Negara governor Tan Sri Zeti Akhtar Aziz said inflation this year was expected to average 4.2%, higher than the projection made earlier this year. The economy, she said, was expected to expand 5% in 2008.

Trading in TNB shares was suspended yesterday to make way for an announcement on the new tariff charges. At a press conference, the company said it expected profits to fall this year as the increased tariff was “not enough” to cover the rising cost of producing power. Trading in the counter will resume today.

Meanwhile, crude oil in New York was almost flat at US$122.38 per barrel at 8pm yesterday. The benchmark contract hit a record US$135 per barrel on May 22 and has risen 86% over the past one year.

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