Malaysia’s economic fundamentals remain intact, regardless of the gloomy scenario and tough challenges faced by its capital market due to recent heavy outflow of foreign funds arising from negative developments locally and overseas, analysts said.
MIDF Amanah Investment Bank Analyst Adam Mohamed Rahim said the favourable outlook was evidently shown by the business tendency index on services sector which indicated strong sentiment, in addition to the commendable distributive trade.
“Following the spike on oil prices, investment in oil and gas is expected to gain traction. Hence, we do not discount the possibility that this will attract foreign interest into Malaysia,” he said.
He said investors reacted negatively to the termination of the MMC-Gamuda joint-venture’s underground work contract for Mass Rapid Transit 2 (MRT2) by the government, and this was aggravated by Wall Street’s biggest loss in eight months as technology companies remained a drag and worries about rising interest rates.
“As of Thursday, the local bourse has declined much more than its ASEAN peers, losing by more than three per cent so far this week, probably exacerbated by the MRT2 issue,” he told Bernama.
He said as foreign funds largely depend on the prevailing sentiment in a trading period, sentiment for the upcoming week would largely centre on the review of the 11th Malaysia Plan (11MP) that might cast some indication on the path of various sectors of the Malaysian economy.
Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid said announcement on the 11MP mid-term review on October 18 would provide clarity on policy direction, thereby providing support to local equities.
He said foreign funds had been net sellers from Monday to Thursday last week with foreign selling amounting to RM2.83 billion, retail selling amounted RM2.31 billion and institutional sell-offs were at RM4.85 billion.
“This was primarily driven by the external factors. Slowing China economy has led People’s Bank of China to reduce the reserve requirement ratio by 100 basis points last weekend,” said Mohd Afzanizam.
On the domestic front, there were mixed reactions among investors as the government had indicated that it might introduce new taxes in the upcoming budget announcement in November.
Meanwhile, MIDF Amanah Investment Bank Bhd Chief Economist Dr Kamaruddin Mohd Nor said the 11MP review was also expected to provide a fillip for the ringgit which has been weighed by external factors.
“Positive news in the form of clear direction and project announcement will excite the market,” he said.
He said the ringgit’s performance in the recent week broadly followed the movement of other regional currencies which were under pressure from the strengthening dollar in the past months.
Kamaruddin said the US dollar index gained 3.12% to-date against a basket of other major currencies, driven by the normalisation in US interest rate amid good economic numbers, while the ongoing trade spat worked against emerging market currencies.
“Investors are on risk-off mode as the level of uncertainties heightened,” he said.
Therefore, he said excluding the unknown impact from the 11MP review, the ringgit was expected to remain under pressure with sideways trajectory with a trading range of between 4.13 and 4.16 vis-à-vis the US dollar next week.
Meanwhile, Mohd Afzanizam said the sell-off in equities was a region-wide phenomenon and following the uncertainty, equity markets would remain edgy next week.
“At the moment, the FTSE Bursa malaysia KLCI (FBM KLCI) is seen to be in oversold position, therefore it really explained Friday’s rebound which saw a gain of 22.25 points or 1.3% to settle at 1,730.74 points.
“We believe values have emerged…the FBM KLCI price-to-earnings ratio currently stands at 16.4 times bases on forward earnings which is below than the +1 standard deviation of 17.1 times,” said Mohd Afzanizam.
However, risk-off trade will continue to dominate market sentiments, therefore, equities are expected to remain choppy in the short term.
Technically, the FBM KLCI might linger around its current support and resistance level of 1,700 and 1,745 points respectively next week.
Dr. Ahmed Razman Abdul Latiff, Putra Business School’s Senior Lecturer and Manager of Business Development, said even though the local market had seen more than RM61.03 billion market capitalisation wiped out between Wednesday and Thursday, the situation would not be long lasting.
“This is because what had happened in the US was caused by a mixture of internal and external issues that would not necessarily translate into worldwide phenomenon,” he said.
Among the internal reasons why stocks had tumbled in the US was because of the ever increasing interest rates imposed by the Federal Reserve, fading technology shares and too high expectation by the investors, he added.
These reasons certainly outweigh the sentiments towards the trade war between the US and China as well as impending sanctions of Iran by the US.
Externally, Adam said the issues of trade war had also taken a back seat in investors’ minds as they were glued to the surge in US treasury yields, but any update on the trade dispute would definitely affect the local market.
Mohd Afzanizam added the ongoing trade war between the US and China had taken another dimension with the recent reports on a hack in computer chips.
On other resounding developments, Mohd Afzanizam said the International Monetary Fund had also revised down its global growth forecast by 0.2% points for 2018 and 2019.
However, he said the US interest rates were likely to go higher in December and next year in view of strong labour markets and increasing inflationary pressures owing to rising wage growth.