PETALING JAYA: The turmoil in global financial markets including Bursa Malaysia could snowball as sustained selling pressure could lead to forced selling on margin calls before any net buying support could emerge to cool the bearish sentiment.
By then the damage could be done to all the bullish outlook calls and why some view the move by Bursa Malaysia to stop short selling on certain stocks will help lower volatility.
But this will not dampen the mood as rising geopolitical risks, slowing global growth and exit from big tech stocks is set to keep global investors on the edge and in a risk-off mode, thus limiting upside but present bigger downside risks.
“Valuations in the tech sector have not been cheap and have, in fact, increased after the year-to-date (year-to-date) price rally, pricing in expectations of future growth from artificial intelligence (AI) and data centre (DC) capital expenditure (capex) spending.
“This (selling) is a mere mean reversion. However, supportive local policies to encourage more foreign direct investments serve as a supporting factor for local infrastructure techs related to AI and DCs.
“Nonetheless, semiconductor-related tech names (personal computers, smartphone and automotive) could see further pressure if the United States and China economies slow down,” said Nixon Wong, chief investment officer at Tradeview Capital.
The soft non-farm payroll (NFP) data in the United States for July last Friday highlighted fears the United States economy was heading into a recession instead of a soft landing as guided to by the US Federal Reserve (Fed).
The high interest rates appear to have scarred the real economy at a time when the Chinese economy is underperforming. The bad news is now bad news for markets.
The weak US data triggered the tsunami of selling yesterday which saw technical support levels shatter on Bursa Malaysia and regional equity markets.
The tech heavy indices like the Nikkei 225, South Korea’s Kospi and Taiwan’s Capitalisation Weighted Stock Index (TAIEX), which were also the major gainers year-to-date, were hit the hardest.
The Nikkei fell 12.4% or 4,451 points at close yesterday and is down some 10,766 points or 25% since its high on July 11, while the Kospi and TAIEX closed down over 8% each yesterday.
The contagion effect saw the FBM KLCI close 74.6 points or 4.6% lower at a four-month low of 1,536 points, despite the ringgit continuing its rally to a 16-month high at 4.428 against the US dollar, which is under pressure from unfolding carry trades against a host of currencies including the yen.
“Amid risk-off sentiment, we have noticed significant profit-taking, particularly among year-to-date gainers, as investors look to secure gains.
“It is reasonable to believe the pressure on gainers is higher than on year-to-date laggards,” Wong added.
Names like Tenaga Nasional Bhd
, Gamuda Bhd, YTL Power International Bhd and Malayan Banking Bhd were among the leading losers, when over 9.26 billion securities worth RM7.97bil were traded.
There were only 83 gainers while 1,659 were lower and the remaining 663 securities unchanged or traded.
Even bitcoin was not spared, falling some 11% or US$6,500 to US$52,640 at press time as cash is now king.
While traders are now pricing in a larger 50 basis points (bps) cut by the Fed in September instead of a 25bps, MIDF Research noted the NFP data, although below consensus, remains above the 100,00 mark, which empirically denotes that the United States labour market is still somewhat in a healthy state.
More months of data could help crystalise a dip in economic activity there.
“During previous recessions, most notably in 2001 and 2008, we saw early symptoms from the NFP.
“In both cases, several (five to nine) months prior, the NFP began to show an early symptom, i.e. intermittently fell well below the 100,00 mark and into negative territory,” said Imran Yassin Yusof, head of research at MIDF Research.
That said MIDF Research noted the bond market and other leading indicators are predicting the United States economy will slip into a recession in the not too distant future.
The United States jobless rate rise to 4.3%, and above market expectations of 4.1%, could be a signal why the pivot by the Fed could be next month and its mandate focuses both on unemployment and inflation.
“A big rate cut by the Fed, combined with positive messaging about a soft landing and substantial stimulus by China, has the potential to reverse sour sentiment in the markets by boosting investor confidence, stimulating economic activity, and stabilising global growth expectations.
“However, the success of these measures will depend on their execution and the broader economic environment, with risks such as inflation concerns and debt sustainability needing to be carefully managed,” said Kevin Khaw, senior research analyst at iFAST Capital..
He said China’s property factors are still dragging the economy while slowing worldwide demand has worsened the situation further.
“The valuation of Chinese stocks are also extremely cheap at this juncture. Having said that, we think it might take some time for the positive sentiment to reflect in Chinese equities, although we are relatively more positive on Chinese equities compared to one year ago,” he said.
That said he noted Asia stands to benefit from the global fund reshuffle, which will bolster market depth as investors seek higher yields amid easing monetary conditions.
The region’s relative attractiveness is further enhanced by recent market exuberance in developed markets, particularly the United States, which has seen volatility spike recently given that the AI-related stocks are priced to perfection.
“While the prospect of a global monetary policy easing is a positive catalyst, we recognise that Asia could take a cue to loosen up policy tone over time but is unlikely to command an aggressive rate-cutting cycle tracking the developed market, as currency stability is more of a priority in the region,” he said.
MIDF’s Imran meanwhile foresees a situation whereby the world’s equity market would remain generally sanguine principally due to the expected monetary easing with the onset of the Fed interest rate cuts, and resilient macro and earnings growth.
“The prospect of a stronger ringgit vis-à-vis US dollar would attract a return inflow of foreign funds, a necessary fillip to the local equity market,” he noted in a market report.
The rally in the ringgit in the past trading week saw net inflows of RM242mil after attracting net flow of RM1.32bil in July.
Wong of Tradeview believes a near-term correction is imminent given the above-stated reasons, but believes the local market direction will be decided by the upcoming corporate results.
“Good corporate results would imply continued strength in the domestic economy and help boost local investment sentiment. At the very least it could provide much needed support, he said.”
