Highlight Local bourse on a tightrope

by **Cals** Mon 11 Aug 2014, 22:49

Highlight Local bourse on a tightrope

Business & Markets 2014

Written by Jonathan Gan of theedgemalaysia.com

Monday, 11 August 2014 08:52

KUALA LUMPUR: The slide in the FBM KLCI last Friday jolted investors on Bursa Malaysia and raised concerns about whether the benchmark, which has been hovering near its peak for several months, would lose its support as geopolitical tension escalates.

Some equity analysts see that the geopolitical tension has given a “reason” for investors to take profits after the local bourse has been directionless for a while.

Consequently, analysts said values would start emerging, particularly among heavyweights.

Many believe that mid- and small-cap counters, which have dominated market interest, will remain the preferred picks

Danny Wong, chief executive officer at Areca Capital, is optimistic that foreign fund flows will return to Asean against the current backdrop of rising geopolitical tension.

“Fund flows will be avoiding [places] such as the Middle East, Argentina and the US at the moment and interest may return to the Southeast Asia region soon enough.”

He did, however, say that Malaysia is considered a secondary market compared with its regional peers. “We will only be in the spotlight after investors rule out the more bullish markets in the region.”

The KLCI took a beating last Friday, reporting its biggest plunge year-to-date. The benchmark index fell 1.47% or 27.45 points to 1839.87 points — the lowest closing since March 26. The index dropped 50 points, or 2.6% from a record high of 1,889.86.

Bursa Malaysia was among the worst-performing markets last Friday.

Alexander Chia, head of research at RHB Investment Bank, concurred that market sentiment had turned “fragile” for now, noting the Argentina default crisis, besides the geopolitical tensions in Russia and the Middle East.

The US Pentagon said last Friday that it had launched an air strike against Islamic militants in northern Iraq, hours after US President Obama authorised American air strikes against the rebels and humanitarian drops to aid refugees.

In Europe, Russia banned most food imports from the West last Thursday in retaliation for sanctions against Ukraine. The import ban would take a heavy toll on farmers in the US, Europe and Australia. President Vladimir Putin is perceived to be wanting to start an “economic war” with the West

Chia expects the market to remain “rangebound” at the moment. He pointed out that most blue-chips are “richly valued”, hence the small to mid cap stocks would attract more interest at this point in time.

“Small and mid cap stocks may see more value at this point in time,” he said.

Commenting on the interest rate hike in the US, Chia said the move is expected to be good for the global economy in general, but in near term some corrections may be seen.

He advocates a “buy on weakness” strategy and suggests “overweight” on oil and gas, property, basic materials and construction sectors for the time being.

Chia expects the release of corporate earnings for the quarter ended June 30 this month will provide a cue to the market.

“Expectations [of corporate earnings growth] are low for the moment with single-digit growth expected,” he said.

Fund managers noted that many stocks have been “priced to perfection”.

“In this scenario, share prices have already factored in a certain quantum of growth, investors are likely to start selling if companies fail to impress with higher than expected jump on earnings,” said an insurance fund manager.

On the foreign fund flow, Chia said at the moment it appears to be mixed as there is no clear indication when the US will normalise interest rates.

He said foreign fund ownership in local funds is down to about 23% currently. “Foreigners are not rushing to get back into the Malaysian market as earnings are lacklustre,” he said. “Interest in trading is there but only in the mid cap stocks.”

But some analysts caution that mid and small cap stocks would suffer more should market sentiment turn sour and trigger panic selling due to low liquidity.

This article first appeared in The Edge Financial Daily, on August 11, 2014.