What’s stopping FBM KLCI from hitting 1,800 points?

Fund managers appear to be taking a cautious stance despite the talk of low market valuation, expected growth in earnings of companies in 2023, etc.

IN the lunar year of the Rabbit, retail investors would probably be wishing for the local market to run up like a hare but it’s more likely it will perform like the tortoise, making gradual gains instead.

The key would be money flow and investors sentiment. The benchmark FBM KLCI has made small gains since the Pakatan Harapan-led unity government took office in Putrajaya but the upside will be capped until investor sentiment improves significantly.

Big money looks set to remain on the sidelines as political risk appears to remain an issue, with no single party holding a clear 112 seats simple majority post-GE15.

Fund managers appear to be taking a cautious stance despite the talk of low market valuation, expected growth in earnings of companies in 2023, etc.

Newsflow of the failed power grab in Sabah and talk of a “London move” or unity party members calling for a say in Bank Negara’s monetary policy decision – all add to the fragile sentiment.

Furthermore, investor expectations might not match the priorities of the government on issues like economic and institutional reform.

One positive is that local institutions could turn net buyers in 2023, with the end of Employees Provident Fund withdrawal schemes, while foreign money remains opportunistic.

The 1,800-mark (last hit in September 2018) is a top too high for 2023, more so if the US Federal Reserve’s (Fed) pivot move gets delayed due to persistently high inflation, which would have spilled over into the services sector.

Volatility is likely as the “high for longer” rate environment could scar the world economy and expose vulnerabilities which transform bulls now into bears.

With self sufficiency instead of cost efficiency the preferred normal in internal trade and investment, the Fed could likely get accustomed to an inflation rate that’s above the 2% level, which will ensure the risk-free rate in the United States remains relatively high and thus keep funds invested there, although the US economic outlook deteriorates in 2023 due to the impact of high rates over the past 10 months.

With the prospects of escalation in the Russia-Ukraine conflict in spring, investors and markets could very likely see much of what transpired in 2022 – risk-off mode with funds generally taking flight to safe-haven assets and the US dollar as commodities remain elevated.

Add China’s reopening to the investment option mix, there’s little reason to expect big fund inflows to Bursa Malaysia in 2023 despite the corporate earnings growth forecast being given by fund managers and analysts from research houses.

Local institutional funds will likely continue to diversify geographically and by asset class, which means the local market hitting the 1,600-point level is more palatable, taking into consideration the economy is forecast to grow at a slower 4% to 5% rate in 2023.

The benchmark index was held up by the improved valuation of banks following the rate hikes by Bank Negara last year, and with another 50-basis-point hike forecast for 2023, the market could have the leg to edge up slightly or the very least not edge much lower.