PETALING JAYA: Investors in Malaysian equities are likely to remain in risk-off mode pending the outcome of the 15th General Election (GE15) and amid the bearish external headwinds that have dampened sentiment and expectations.
With many analysts anticipating the local market to get a boost from the Budget 2023 announcement last Friday, the move by Prime Minister Datuk Seri Ismail Sabri Yaakob to dissolve Parliament on Monday resulted in the reverse on higher political risk and the potential of a negative outcome, which could delay the retabling and passing of the budget.
Investors trimmed stakes in local equities as the benchmark FBM KLCI fell 19 points, or 1.4%, to 1,386.8 points yesterday following a weak handover from major markets following bearish labour market data out of the United States on Friday.
The FBM KLCI tested a 29-month low in intraday trade at 1,383 points as heavyweight stocks like Nestle (M) Bhd
fell RM1.40 to RM129.50, Malayan Banking Bhd fell 21sen to RM8.44, IHH Healthcare Bhd eased 11 sen to RM5.65 and Petronas Gas Bhd lost 36 sen to RM16.10.
The ringgit hit a new 24-year low of RM4.67 against the greenback, which took the FBM KLCI year-to-date losses to 11.5% and in US dollar terms, 21% lower and into bear market territory (See chart).
The selling pressure did not surprise some, based on the historical trading action ahead of general elections.
“The conventional wisdom was that our market would get excited with the mere mention of a general election.
“However, since the year 2000, we observed that market performance (i.e. the FBM KLCI) prior to an election has been mixed, and price action seems to come in after an election.
“While GE15 may excite politically, for the equities market, we expect external factors to continue to hold sway over equity market sentiment,” said MIDF Research head of research Imran Yassin Md Yusof.
That is the view of most investment advisers as well. Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong said Malaysian equities traded weaker largely in line with the softer market conditions across the region.
“While the announcement of Parliament dissolution almost immediately after the tabling of Budget 2023 took most by surprise, the expectation of an early general election has built up somewhat in the past several months,” he said.
Yong, however, sees the move to dissolve the Parliament as a strategic move made by the Prime Minister, who hails from Umno.
By-election results post the last GE and recent ruling government policies on Covid relief and a very successful Covid vaccination programme rollout have raised expectation of an Umno-led government securing a successful mandate, he opined.
“While institutional and retail investors react very differently to political developments, the direction of Malaysian equities in the short term will not be independent of the confines of regional markets,” he added.
Fund flow data suggest foreign investors have turned net sellers of local equities since early September to the tune of RM1.45bil, while local institutions were net buyers of RM1.29bil worth of stock in the same period.
On the external front, the strong employment job data for September in the United States on Friday suggests spending habits haven’t changed at a rate desired by the Federal Reserve (Fed) to bring down inflationary pressure in the economy there.
The strong data cemented the chance of another supersized 75-basis-point hike in the Fed fund rate in November with the bias for more hikes ahead, and thus heightened the potential of a deeper recession in the US should the policy measures overshoot.
The call by the International Monetary Fund to keep tightening monetary policy in face of sustained inflationary pressures despite weaker growth outlook will further ensure the hawkish Fed goes higher for longer and reverse its quantitative easing in the months ahead.
This could be the fallout from the decision by the Organisation of Petroleum Exporting Countries and its allies to support high crude oil prices by cutting production by two million barrels a day, which could ensure energy prices remain elevated and inflationary to most importing economies.
The escalation in the Ukraine-Russia conflict and the health of the Chinese economy and its Covid-19 policy stance will be the other major factors impacting market sentiment while the earnings revision lower now underway will likely trigger a deeper correction in equity markets.
For the local front, the bearish development abroad will likely result in a weaker ringgit-greenback exchange rate, as economists have a consensus view that Bank Negara will not keep pace with the margin of Fed rate hikes at the expense of a weaker local unit.
Due to the fluid political and policy development, MIDF Research foresees a situation whereby the local equity market valuation remains rather depressed (at below normal historical range) due to the consequence of the Fed extended its aggressive tightening on the world’s financial liquidity.
“We believe investors are now more concerned about the resultant (political, societal and economic) stability post-GE15 and less on pre-election goodies and promises,” it added.
It expects the local equity market valuation to crawl higher once clarity is achieved post-GE15 and the FBM KLCI to close at 1,520 points by end-2022 from current levels, helped by sustained positive gross domestic product growth into 2023.
