PETALING JAYA: The bombshell dropped by Umno chief Datuk Seri Ahmad Zahid Hamidi that the party will not be formally joining the ruling Perikatan Nasional pact has rocked the stock market.
The news, which came following the move by the Sabah chief minister frantically dissolving the state assembly for fear of losing majority support, sent Bursa Malaysia’s barometer index FBM KLCI below the psychological level of 1,600 points by mid-evening.
While it appears to be a knee-jerk reaction as the 30-stock index quickly rebounded and closed at 1,603.75 points - despite falling by 7.67 points or 0.48% - this has cast a major doubt on the outlook of the stock market on the heels of the mounting political uncertainties.
The overall market breadth yesterday, however, was overwhelmingly negative as 668 decliners trumped 390 gainers. A total of 416 counters remained unchanged.
Speaking to StarBiz, fund manager Danny Wong (pic below) said he believes that rising political uncertainties could have an impact on the stock market performance, although he feels that Malaysians have become used to “such noise.”
“As long as there is no major policy change, that will not affect the market much.
“However, if there is a snap poll, there could be a slightly negative knee-jerk reaction, ” said Wong, who is the CEO of Areca Capital.
Concurring with Wong, Equitiestracker Holdings Bhd head of research Peter Lim Tze Cheng expects the latest developments in the local political scene could spark a knee-jerk reaction, although the impact may not be major.
While investor behaviour was hard to predict, he said political uncertainties were nothing new in Malaysia, especially post-the 14th general election in May 2018.
“What happened (the political uncertainties) were already anticipated to an extent... the market will only react if there is an element of surprise, ” he said.
Using the United States and the United Kingdom as examples, he said market reactions may completely differ with expectations.
“Analysts said the market will crash if Donald Trump was elected or if Brexit is approved.
“But, the market still rallied even after that. You may never know, ” he said.
Lim pointed out that it was more important for investors to look beyond political uncertainties, and focus on company performance.
He said investors should avoid politically-linked companies on the bourse or companies that rely extensively on government contracts.
“Instead, focus on companies with global exposure and good prospects such as tech stocks, ” he said.
Bursa Malaysia, which is currently in a technical bull run, sees headwinds not only from the latest developments in the political arena, but also from the continued exodus of foreign investors and the looming end of the blanket moratorium.
For context, net outflow of foreign funds from the local bourse was RM910.2mil in the July 20-24 week.
This was the 23rd consecutive week of foreign net selling.
Year-to-date till July 24, foreign investors have sold RM18.8bil net on Bursa Malaysia.
At a time when foreign investors continued to dump local stocks, local retail or individual investors have held the fort for Bursa Malaysia.
In fact, the massive liquidity on the stock market has been largely fuelled by retail investors, who have been sitting on unused cash as a result of the blanket loan moratorium.
However, with the loan moratorium to end in September, there are concerns that Bursa Malaysia could be on borrowed time as liquidity may dry up once people start repaying their loans.
The shift towards a targeted loan moratorium may be a win-win situation for the banks and financially troubled borrowers, but that may not necessarily be the case for those in the stock market.
It appears to be more than just a coincidence that the trading volume on the local stock market has increased by leaps and bounds since the blanket loan moratorium started in April.
For perspective, the daily trading volume has by large stayed below 4 billion shares since 2010, but this has changed noticeably since April 2020.
Bolstered by the bull rally, the market kept witnessing new record-highs in trading volume, with the latest all-time-high at 12.5 billion shares on July 20.
Investors’ attention was largely focused on small- and mid-cap stocks, judging by the daily average share price traded.
Between April 1 to July 30, the average daily volume was 7.41 billion shares, while the average daily trading value was RM4.21bil.
This translates to an average share price of only 56.82 sen, indicating clear interest in small- and mid-cap stocks.
However, as all good things are likely to come to an end, the attention has now shifted to what awaits the stock market as the moratorium nears its end.
Areca Capital’s Wong said the end of the loan moratorium will have an impact on the stock market performance.
While he foresees the liquidity on Bursa Malaysia to ease, he believes the impact may not be substantial.
“Take a look at the low fixed deposit rates currently. People will naturally shift from low-yield assets like fixed deposits since the returns are not attractive, to high-yield assets such as stocks.
“So, this would keep the liquidity in the stock market going, ” he said.
Moving forward, Wong expects the outlook of the stock market to likely improve, on the back of economic recovery, attractive ringgit and the fact that Malaysia has fared relatively better than regional countries in tackling the Covid-19 pandemic.
Meanwhile, an analyst who spoke to StarBiz also said that the overall liquidity on Bursa Malaysia is expected to reduce as loan repayments begin, although the decline may not be significant.
“I don’t think the investors are going to exit completely, but they probably need to prepare ahead of the loan moratorium ending to start setting aside some money to repay the six months in arrears.
“It’s logical to expect some tapering off of liquidity in the market, ” he said.
Moving forward, retail investor participation in the market could ease on a gradual basis, according to him.
“They are sitting on a lot of profits. What they may do is slowly trim down and start realising their profits, ” he added further.
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