Pressure on equity market

STOCK markets in Asia tumbled into technical correction, with some falling into bear-market territory, over the week as investor sentiment turned cautious on geopolitical concerns as well as the impending rate hike by the United States Federal Reserve (Fed).

While most markets in the region managed to pare some losses yesterday, the selling pressure is expected to persist in the coming weeks as investors brace for more uncertainty and volatility.

The Malaysian market had largely performed in tandem with regional trend.

The benchmark FBM KLCI yesterday rose for a second day, gaining 4.03 points to close at 1,520.02. On Wednesday, it tumbled close to the psychological 1,500-point mark at 1,503.34 before recouping some losses to close at 1,508.91.

In total, the index, which comprises 30 largest companies by market capitalisation, had lost about 0.4% over the week.

Year-to-date, the index had shed about 3%.

The FBM KLCI could test the 1,500-point level in the short term, an analyst tells StarBizWeek, citing growing uncertainty.

“The geopolitical tensions between Ukraine and Russia remain unresolved, so investors are turning more defensive, even as they brace for a potentially more aggressive rate hike in the US, which could lead to an outflow of funds from emerging markets such as Malaysia,” he explained.

The analyst pegs the crucial support for FBM KLCI at 1,500; the next support is seen at 1,475 if the index breached the psychological mark. Immediate resistance is pegged at 1,530 for the time being.

Separately, one broker argues that the Malaysian market will likely see limited downside, noting the likelihood of local institutional investors stepping in.

“We expect there to be a lot bargain-hunting activities once the FBM KLCI is near the psychological level. Hence, downside is likely capped,” he notes.

According to Rakuten Trade head of equity sales Vincent Lau, the volatility in the local stock market will likely continue if conditions on the global front continue to worsen.

He, however, points out that the volatility could just be a temporary or “knee-jerk reaction” to near-term uncertainties amid growing tensions in Europe as well as a hawkish Fed.

“With the results season already commencing, we believe this will provide a bit more guidance and also a catalyst to sustain our market,” he says.

Rate hikes

Fed chairman Jerome Powell over the week reaffirmed plans to end its bond purchases in March. He also said the US central bank would likely begin to raise interest rates that month – something markets had priced in, alongside three more increases through 2022.

AmInvestment Bank Research in a note yesterday said it maintained the view that the Fed would raise interest rates three to four times in 2022 and continue to do so until it reaches 2.50%–2.75% from the current 0%-0.25%.

For Malaysia, the brokerage said Bank Negara is also anticipated to pave the way for higher interest rates in the second half of 2022, with one to two rate hikes of 25 basis points (bps) each.

Bank Negara kept the benchmark overnight policy rate (OPR) unchanged at 1.75% over the week. It said risks to the growth outlook remained tilted to the downside.

“We believe that economic growth momentum, rising inflation and addressing interest rates differential would be the major factors supporting a rate hike,” AmInvestment Bank Research explained.

“Inflation is expected to stay elevated in the short term although it could be on a decreasing trend through the year. However, one could be strongly underestimating what higher power prices could do to inflation, corporate earnings and growth across the global economy,” it added.

AmInvestment Bank Research maintained its end-2022 FBM KLCI target of 1,600 points based on an unchanged forward price-earnings valuation of 15.6 times, which is pegged at -0.5 standard deviation.

“The discount is to reflect the negative earnings growth projected for the total FBM KLCI component earnings in 2022 and a higher stamp duty for share transactions, which will affect trading volume,” it explained.

“For 2022, we expect FBM KLCI earnings to decline by 3.5% due to lower earnings projection for the glove and plantation sectors,” it added.

AmInvestment Bank Research said a hike in interest rates would be positive to the banking and glove sectors.

“Higher interest rates will increase banks’ net interest margins (NIMs). Loans will be repriced ahead of deposit rates. This will translate into higher net interest income for banks,” the brokerage said.

Its sensitivity analysis of interest rates showed a 25bps increase in the OPR will expand banks’ NIM by 3 to 4bps and improve banks’ net profit of by 1% to 2%.

“Banks with a higher mix of floating rate and domestic loans will benefit more from OPR hikes,” it said, adding it has an “overweight” call on the sector.

As for the glove sector, AmInvestment Bank Research said all the three glove companies under its coverage – Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd – are in net cash position.

“Hence, a higher interest rate will translate into higher interest income for glove companies. However, we maintain our ‘neutral’ call on the sector as average selling price is still in a downtrend,” it said.

On the flipside, the brokerage noted that a hike in interest rates would be negative to the automotive, consumer, healthcare, insurance, oil and gas, property, real estate investment trust and technology sectors.

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