Market rebounds, volatility ahead

KUALA LUMPUR: Following weeks of selling on global equity markets, some signs of hope emerged for local investors yesterday. However, the experts warned of more volatility ahead.

A late rally on Wall Street Tuesday led the FBM KLCI to chalk up a gain of 14.3 points or 1.05% to end at 1,375.67 yesterday, with advancing stocks beating declining ones by a nearly two-to-one margin.

Is it time to pop the champagne, hibernate the bears and call out the bulls?

Not just yet, analysts cautioned, although expectations of a people-friendly budget, early general elections and rising mergers and acquisitions (M&A) may be market-supportive.

The current high levels of volatility and uncertainty, amid oversold market conditions, suggest that there could be intermittent short rallies in between. These, however, risk turning out to be “bear traps” as investors are taking an increasingly short-term view, and analysts have advised bargain-hunting investors to hold off from buying for now.

Another factor to note is the local bourse’s strong outperformance. Amid the global selloff, the FBM KLCI has been fairly resilient relative to its regional peers.

The local benchmark index has lost 9.4% year-to-date — a modest figure compared with the Hang Seng Index and the Nikkei 225, which have shed 29.4% and 18.05% respectively since the beginning of the year.
Ching maintains his year-end target of 1,450 for the FBM KLCI.
Eng: Markets are now pricing in the possibility of a recession.

For the month of September, markets in Indonesia, Thailand and the Philippines declined more than 7% while the FBM KLCI lost less than 3%.

In the US, the Dow Jones Industrial Average gained 152.4 points to close higher at 10,808.71 on Tuesday. However, it has been a somewhat volatile month following the start of the heavy selldown in early August. In September, the benchmark index registered a high of 11,613.53 points and a low of 10,655.30 (a new 52-week low), a difference of 8.3%.

The Euro Stoxx 50 Index, which is the leading blue-chip index for the eurozone, lost nearly 6% in September and has dropped 24.1% year to date.

The high volatility in the market, according to analysts, makes for a less than ideal playing ground for investors.

“People are giving themselves too short a time frame to see returns, it has very much become a hit-and-run market,” Lee Cheng Hooi, Maybank IB Research’s head of retail research told The Edge Financial Daily.

He said the FBM KLCI may experience a longer-term shock as global markets become more unpredictable, a number of them registering a decline in excess of 20% from their recent highs.

“It is definitely not the right time to buy. Rallies in a bear market may point towards a potential downturn and it could take a very long time before we see a more stable rebound,” said Lee.

The FBM KLCI may go to as low as 1,149 in the mid-term, he said. That suggests a downside of up to 16.5% from current levels if his predictions are correct.

OSK head of research Chris Eng has changed his view from a ‘time-based’ to a ‘level-based’ approach. “The market could drop to the levels seen in our last recession, though it is very hard to say how probable this scenario is.”

Eng is currently “neutral” on the FBM KLCI, and said that his recommendation would be upgraded to a “buy” if the index were to drop below the 1,300-point level.

“Given volatile market conditions, it is difficult for us to forecast when the FBM KLCI may fall past the 1,300-point level although a break below (that level) is possible in October itself. Additionally, if Greece were to default on its debt and the FBM KLCI still maintains above 1,300, then we would definitely upgrade our recommendation,” said Eng.

He added that even if the market were to fall further, the FBM KLCI would unlikely go beyond its recession-time bottom of 1,086.

“Markets are now somewhat pricing in the possibility of a recession, though we also note that the most bearish of current economic forecasts still indicate economic growth for Malaysia in 2012,” he said.

Another analyst said the market may have not fully priced in the possibility of a recession.

“There may be a further downside as the market computes in external shocks, possibly from policy missteps (in Europe),” said ECM Libra head of research Bernard Ching.

He said investors could acquire stocks at their current levels, which are relatively cheap, though it would better suit a long-term investment horizon rather than a quick buy-and-sell strategy, as the market may prove to be volatile in the short to medium term.

He said there may be a further downside potential of between 22% and 37% for the FBM KLCI to settle at between 863 points and 1,068.

“The probability of it going that low is becoming increasingly possible, it is showing to be the path of least resistance. However, should the recession be averted, the market should rebound to 1,438,” he said.

Ching maintains his year-end target of 1,450 for the FBM KLCI, although he introduced a “conservative” target of 1,440 for 2012. ECM Libra has a “neutral” call for 13 of the 17 sectors listed under its coverage.