UOBKH Research said the FBM KLCI’s 4.6% plunge on Aug 5 provides a “compelling and rare” buying opportunity in the intermediate term.
PETALING JAYA: After a brutal Monday that wiped out the Bursa Malaysia FBM KLCI’s entire gain since mid-April, the benchmark index recovered half of its losses as investors jumped on the opportunity for a quick flip.
However, it may be too early to celebrate the rebound of 37.91 points yesterday, analysts cautioned despite their typical calls for bottom-fishing.
Market observers opined that volatility and panic remains in the system, indicating that the rebound could struggle to sustain.
Wall Street’s “fear gauge” – the Cboe Volatility Index or VIX – remained elevated at about 31 as at press time, despite cooling off from a four-year high when the VIX briefly crossed over 65 on Aug 5.
At 31, it is still the highest since October 2022.
The heightened fear was caused by speculation about a recession in the United States after the jobless rate ticked up to 4.3%, the highest since October 2021, and the Federal Reserve’s reluctance to cut interest rates.
Meanwhile, in the 20 countries that use the euro currency, gross domestic product (GDP) growth was merely modest in the April-June quarter.
Germany, the biggest European economy, fell into a contraction.
Malaysia, despite recording a 5.8% GDP growth in the second quarter based on advance estimates, is collateral damage to the economic weakness in the West.
This largely explains the massive bloodbath on Bursa Malaysia on Aug 5, along with other Asian markets. These markets have mostly staged a partial rebound the next day.
Kevin Khaw Khai Sheng, research analyst at iFAST Capital, told investors to brace for a higher volatility environment in the months ahead.
In the short and medium term, he said recessionary fears have not gone away.
“This will likely impact the regions or sectors that have rallied tremendously and are notoriously sensitive to business cycles.
“For investors who are yet to be invested but considering it, current valuations may present an attractive entry point.
“However, be prepared for anticipated turbulence ahead and the need for patience to realise significant gains,” Khaw told StarBiz.
UOB Kay Hian (UOBKH) Research said the FBM KLCI’s 4.6% plunge on Aug 5 provides a “compelling and rare” buying opportunity in the intermediate term, although the nearer-term situation remains fluid.
“We attribute the panic selldown to the unwinding of the yen carry trade, deep escalation of the Middle East conflict and fears of a US recession.
“We maintain our end-2024 FBM KLCI target of 1,735 points.”
In contrast, former head of research for a local investment bank Mohd Redza Abdul Rahman said that it will be “quite hard” for the FBM KLCI to return to the 1,600-point level.
This is because “negative news is still filling the air”, according to him.
The year-to-date peak of the FBM KLCI was 1,636.55 points on July 19, following which the index has been slowly trending downwards.
On Aug 5, the heavy equities selldown globally dragged down the FBM KLCI by 74.57 points or 4.6% to 1,536.48 points.
Yesterday, the barometer index rebounded to 1,574.39points, after rising by 2.5%.
Explaining further on the negative news affecting investor sentiment, Mohd Redza said the layoffs in the technology industry have not stopped, amid the sharp slowdown of US jobs growth.
It was reported that tech layoffs had crossed 100,000 jobs in July, involving companies like Intel, Microsoft and Dyson, among others.
“And with the US dollar weakening, even before the rate cut, we could possibly still see net foreign outflow of funds from profit-taking and possibly repatriating the funds back by converting into US dollars.
“You will get more US dollars for less ringgit.”
The fact that Bursa Malaysia is heading into the second-quarter earnings season, which could see investors reacting to the possible impact of blanket diesel subsidy removal, may also affect market sentiment.
“The impact is supposed to be minor in nature but we all know the behavioral impact it will have on the retail investors
“Plus, the geopolitical news also might also cause some dent – with Bangladesh and the United Kingdom having protests as well as what’s going on in the United States, with strained relationship with China as well as the upcoming US presidential election in November,” he said.
iFast’s Khaw said the recent equities selldown was predominantly driven by negative sentiment rather than any material deterioration in fundamentals.
UOBKH Research also said that the market capitulation was clearly an “overreaction”, which was a surprise given the healthy domestic liquidity.
“The selldown was predictably caused by the domestic retail and foreign investors.
“However, external uncertainties persist, implying continuing near-term volatility,” the research house noted.
Looking ahead, Khaw expects Bank of Japan to continue with its hawkish stance, with another round of potential rate hike by end-2024.
With this, the global carry trades might resume unwinding as the Japanese yen is no longer known as a ‘no-brainer carry trade instrument’.
“On top of that, worries about US recession risk and upcoming uncertainties surrounding the presidential election might add insult to injury,” he said.
The upcoming second quarter local earnings to be released from mid-August will be the closest testament for the resiliency of local companies to withstand the current development, Khaw opined.
“Having said that, with the hype around the thematic story including infrastructure revival and technology play, we are going to witness how the execution phase works or how the story transforms into a real catalyst of local economy.
“Nevertheless, we believe Malaysia’s economic recovery is gathering pace aided by the domestic factors including better policy clarification and foreign investment influx, which translate to our sanguine view on Malaysia to outshine the peers in the year ahead.
“Our target for FBM KLCI is set at 2,000 points in 2026 on the back of the anticipated optimism to reflect on domestic bourse,” he added.
