An eventful week ahead for equities

by **Cals** Mon 14 Oct 2013, 10:59

Business & Markets 2013

Written by Fatin Rasyiqah Mustaza of theedgemalaysia.com

Monday, 14 October 2013 10:10

KUALA LUMPUR: Should the US government be not able to decide on its budget, the Malaysian economy and equities market may face a slowdown, according to analysts.

Areca Capital CEO Danny Wong said if the US economy does not recover, the Chinese economy will also face a slowdown and that will affect Malaysia, whose biggest trading partner is China.

“Our exports will be low because of a possible further shutdown and China is our [Malaysia’s] largest trade partner. China on the other hand trades with the US,” he said.

Wong said if the US faces an ultimate shutdown, it will result in a global shutdown as it is the largest economy and many countries have trading ties with it.

If the US’ debt ceiling rises and the Democrats and Republicans can’t decide on the budget, the US treasury will not have any money to pay civil servants and finance projects which will ultimately affect the global economy.

The outlook on Malaysia’s equity markets is still uncertain. This will depend on the impending Budget 2014, the US budget and debt ceiling movement.

“Our market will be sidelined. Investors will probably not do anything but will wait and see. Our economy will stand though because corporate earnings are still intact, so no one will want to sell down at this level and will wait for the events to be over,” said Wong.

He said 2013 has been a good year for the local market and investors should close their books and wait for next year. Also, holidays are around the corner and the market will be quiet as many people will be taking their breaks.

“There will be a standstill and investors need not panic but just wait for the issues to be resolved,” said Wong.

Vice-president of Affin Investment Bank Dr Nazri Khan said a proposal by the Republicans to extend the debt ceiling for six weeks will be the catalyst for the market this week.

“Despite being a short-term resolution, positive hints from the White House suggest the US government shutdown and the largest bond default will be avoided by Oct 17.

“We see a wave of bullishness sweeping through global markets on optimism that politicians in Washington are finally nearing a debt deal breakthrough,” said Nazri.

This is reflected by some of the most impressive equity movements seen this year with the MSCI global equity indices, FTSE all world index, S&P 500 and FTSE Eurofirst 300 up 2.4%, 2.3%, 2.2% and 1.8% respectively.

The FBM KLCI has broken from the narrow 1,760 points to 1,780 points with a strong upside gap and positive oscillators which may suggest stronger bulls ahead.

“From the inter-market analysis perspective, the stronger lead performance by economically-sensitive sectors such as finance, TECHNOLOGY [] and construction as well as stronger gains from smaller cap stocks suggest healthy momentum in the near term,” said Nazri.

On Budget 2014, Nazri expects the much-delayed projects and structural reforms to be executed that should raise investor confidence and attract more foreign inflows.

“Budget 2014 should bring cheer to the equity market through targeted allocation for the low-income group, rural infrastructure, tourism promotion, national broadband and national healthcare which will specifically benefit the consumer, construction, technology, insurance and hospitality sectors,” he said.

The research house has seen signs of the pre-Umno election rally with construction stocks such as IJM Corp Bhd, GAMUDA BHD [], MMC Corp Bhd, MALAYSIAN RESOURCES CORP [] Bhd, Muhibah Engineering Bhd and WCT Holdings Bhd taking the lead.

“Further signs of rebound from the politically connected stocks should be positive for local sentiment,” Nazri said.

Wong said there are three main issues that should be addressed to avoid further sovereign rating downgrades and the budget should tackle the fiscal deficit and debt as well as maintain growth.

“Anything lower than an ‘A’ rating will not attract international funds to the local market as it will go against the funds’ mandate,” said Wong.

This article first appeared in The Edge Financial Daily, on October 14, 2013.