Investors and analysts await fresh catalysts and thematic plays to show proof with higher earnings amid rising macro headwinds.
PETALING JAYA: Analysts believe a pivot by the US Federal Reserve (Fed) may not lead to significant inflows and gains on Bursa Malaysia, where investors and analysts await fresh catalysts and thematic plays to show proof with higher earnings amid rising macro headwinds.
While the by-election defeat in Penang last week may test the resolve of the coalition government to cut fuel subsidies on RON95 petrol to achieve its budget deficit target under Budget 2024, analysts see some positives for the market.
“We don’t think the by-election result and possible impact on fuel subsidy rationalisation would affect investor sentiment and limit the upside for the local market.
“In fact, it might be a catalyst to support consumer sentiment and cushion the impact from macro backdrop and diesel subsidy rationalisation.
“It is a known fact that the government is trying to control the deficit and implementation of electricity tariff/RON95 subsidy rationalisation, which will be just a matter of time,” said Kevin Khaw, senior research analyst at iFAST Capital.
In the short term, he said the macro backdrop, such as the US second-quarter corporate earnings season and upcoming US presidential election in November might weigh on investor sentiment and Bursa Malaysia’s performance.
While the US election run-up is heating up, “Tariff Man” Donald Trump has already warned about his plans to escalate the trade and tech war with China, raise US tariffs on the rest of the world and penalise countries that run a wide bilateral trade surplus, all of which could directly or indirectly impact Malaysia, according to Maybank Investment Bank.
“Trump said he will impose tariffs of 60% or higher on Chinese goods and a blanket 10% tariff on imports from other countries, including Asean, which risks triggering a global trade war.
“The blanket higher US tariffs will increase the incentive to onshore and penalise offshoring.
“Trump has pledged to crack down on tariff evasion and trade diversion, which could result in collateral damage on Asean and discourage Chinese manufacturing investments in the region,” the bank stated in a report.
Meanwhile, investors will also be eyeing the third plenary session of the Chinese Communist Party’s 20th National Congress from July 15-18, which could provide policy directions and much needed support for the ailing Chinese economy.
Hence, not surprisingly, more upside gains in the near term for the benchmark FBM KLCI beyond the two-year high watermark of 1,632 points may be limited, said analysts.
“In the next two months, we believe the upside may be capped in the absence of fresh catalysts, coupled with potential volatility from news flow surrounding the US election outcome.
“The market direction will also likely be determined by the upcoming corporate results reporting season in August,” Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd told StarBiz.
He explained that macro factors like the much-awaited interest-rate cut or pivot by the Fed, speculated to occur by September with as much as 50 basis points for the year, will be seen as normalisation of its interest rates rather than a reaction to slower growth in the economy there.
“Thus, we believe it may not have a significant impact on the market even if the Fed does cut in September, given that the market has already priced in some probability of two rate cuts,” he said.
Fed chairman Jerome Powell is set to brief Congress on the state of the economy this week and is expected to offer dovish comments supportive of rate cuts following the softer US labour market data (jobs falling, unemployment up), a sign the high rates are heaving in impact on the real economy and cooling inflationary pressures, which could be reaffirmed by weaker consumer price index data later tomorrow.
Even with a cut in US rates, fund flows may not return to emerging markets like Bursa Malaysia just yet, since economic growth remains healthy in developed markets, said Wong.
“Foreign shareholding in Bursa Malaysia, which is near an all-time low of 19.6%, is likely to stay at this level.
“However, compared with other countries in this region, there is room for upside to Bursa Malaysia due to domestic factors such as policy rollout, healthy foreign direct investment growth and overall economic expansion,” he said.
That belief was reflected in the price action on Bursa Malaysia in the past couple of months.
The FBM KLCI, which closed at 1,614 points yesterday, has come under profit taking in the past month after hitting a high of 1,632 in late May before retracing to a low of 1,581 points in late June, before staging a minor recovery to current levels.
The pullback is seen as a healthy correction, driven mainly by outflow of foreign money in June with the market supported by local institutions as the main buyers.
“We deem the pullback as a healthy correction as most of the price rally in the local market was supported by thematic ideas and is yet to be reflected in the earnings of the companies involved.
“It is a minor cooldown for investors to re-evaluate the fundamentals instead of chasing the rally,” said Khaw of iFAST Capital.
The trading data also suggested local institutional support could limit downside for the local market.
