Posted on 03 Jul 2015
"We reckon the prevailing negative pressure on the short-term direction of the local equity market would be neutralised only pursuant to the subsidence of foreign liquidity outflows, and non-disruptive outcome of the investigation on 1Malaysia Development Board (1MDB)," its head of equity Syed Muhammed Kifni said in a report yesterday.
"On this score, the pace of market absorption or normalisation with regard to the outstanding issues would have a great bearing on the timing of subsequent cyclical upturn hence the attainment of our year-end FBM KLCI target," he added.
Syed Muhammed said he was aware of the significant risk on either or both issues becoming protracted thus retarding the pace of normalisation.
"Therefore, while we reiterate our long-standing view on the continuance of the upward secular trend of the FBM KLCI underpinned by sustained macroeconomic expansion, we are keeping our short-term 2015 year-end target of 1,900 points under review for possible adjustment," he said.
Syed Muhammed said the market's initial reaction to the Fitch Ratings upgrade in sovereign credit outlook seemed strong and determined so much so that, technically, "the FBM KLCI may have moved passed the inflexion point in so far as the recent cyclical pullback, which started in early May this year is concerned".
"Hence we would not be surprised to see the market holding above its psychological supports most notably the 1,700 points level and perform positively in the weeks to come," he said.
Syed Muhammed added the upgrade in sovereign credit outlook is seen as a vote of confidence in the country's fiscal management and may reflect the rating agency's relative sanguinity with regard to Malaysia's macro outlook.
However, he said that in the interim, the equity market is expected to remain cautious due to the hitherto persistent region-wide foreign equity funds outflows believed to be in anticipation of the upcoming hike in US interest rates.
He added that market wariness is further exacerbated by the unsettled
domestic political spats involving both intra- and inter-coalitions
with matters relating to the beleaguered 1MDB.
"The good news is that the economic fallout from 1MDB's extended
leverage position is believed to be non-systemic, and we share the same
belief," he said.
Meanwhile, Syed Muhammed pointed out that the political implications are dependent on the outcome of ongoing official investigation.
"However, if the investigation results turn out to be less than satisfactory, the consequences may prove disruptive to the current political order," he said.
Meanwhile, Citi Research said the unexpected but positive outlook review from Fitch drove the KLCI yesterday, taking away one of the two fear factors that have reduced foreign interest in Malaysian equities to minimal levels.
However, it said finding a proper financing resolution for sovereign entity 1MDB's debt portfolio remains the key challenge if foreign investors are to look again at Malaysian equities.
Citi pointed out that the KLCI weakness thus far is linked to weak corporate earnings, poor consumer sentiment and impact of debt leveraging.
For the first quarter of 2015, the earnings revision count (ERC) ratio had deteriorated rapidly to 49% (compared with 39% post Q4'14, 53% post Q3'14) as earnings downgrades increased substantially.
Following Fitch's rating upgrade, Citi said stocks well owned by foreigners that had been sold in the past quarter rebounded well yesterday.
Its top picks are Public Bank Bhd, IJM Corp Bhd, Tenaga Nasional Bhd, Malaysia Airports Holdings Bhd and Top Glove Bhd.
Bursa Malaysia ended higher yesterday on better sentiment due to the Fitch upgrade.
The FBM-KLCI was up 5.92 points or 0.34% to 1,733.88, the third straight days of gains for the for the 30-stock index.
